The Money Tree and Compound Interest

By Michael Knight

Monday 28 December 2009

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As Christmas Day passes by for yet another year, many people are left feeling depressed, wondering how they can afford to repay their credit card bills and the like from having overspent on a myriad of Christmas gifts, with some possibly never needing to be bought in the first place.

So what is this magical phenomena that causes an inducement of some kind where people not only blow their weekly and yearly budgets, but in fact create walls which hinder their chances of attaining real financial freedom?

Whilst buying presents and celebrating is a glorious thing, the unfortunate side and all too often occurrence is the added financial stress people place upon themselves causing families to Separate.

Some good news that may help you and your family is acquiring some financial knowledge and discipline on the topic of Compound Interest. There are many tools and ways to becoming financially wealthy and Beyond will be explaining various methods in due course, however for now here is but one of them.

Although compound interest is a simple yet important factor to help manage money in your life, it's surprising how many children aren't taught the proper value of this financial formula by parents and our education systems alike. Perhaps if this was done, we just may see more families staying together.

So what is compound interest?

It's simply a way of calculating interest on the money you lend or borrow. It can either work for you in a big way, or it can sink your ship and is especially effective over long periods of time.

Simply, it's what the banks use at calculating interest on your mortgage. If it's good enough for the banks to use, it's way good enough for you to take a serious interest in, pardon the pun, and start practicing. Become the lender not the borrower.

So where do you start?

You will need to master the simple art of paying yourself first — no matter what — socking this money away so it can start to work for it's keep. Whilst it may seem simple at first, it is truly a discipline, as there will be many people, influences and distractions that will attempt to sabotage your efforts, so be aware!

Remember this one thing — if you don't remind yourself to pay yourself first, who will?

Will your bank, who seeks payment of your credit card bill and mortgage? Your landlord, who you pay rent to, the utility companies or your boss? I don't think so. They will remind you to pay their bills and roll up to work on time but certainly won't remind you to pay yourself first. The only people that may give you this knowledge would be people in the know and who care about you, such as parents, family and websites like this.

When should you start?

Now — and with say at least 10% of all you earn, before any outgoings. It's imperative you get into this good habit as young as possible, as soon as you earn or come into money, and then put this money to work.

It's never too late and certainly not a mistake if you haven't up until now, however it will become a mistake if you choose not to learn more and take some positive action after reading this article, after all we do live in a materialistic world and the good life is easier to enjoy with a few shekels in your pocket.

The really good news is that anybody, and I mean absolutely everybody that receives some money can do this, and what's more it can be fun and exciting. A paper boy or girl or someone doing odd jobs saving simply $10 per week from the age of twelve for forty years will be in fact wealthier for less money invested, compared with an adult saving $100 (ten times the amount) from the age of thirty for twenty two years.

After beginning at the age of 12 with $10 and adding $10 per week for 40 years at 10% pa, this person starting out earning a meagre income and developing a rock hard habit, would reap the rewards of some $279,826.33. Not bad for $10 per week — a success goal in any child, teenager or adult's reach.

This in contrast with the adult who starts with $100 at the age of 30 and saves $100 every week for 22 years also at 10% pa would accrue a total of $508,547.98, made up from your contribution of $124,792.86 and interest of $383,755.12. So it's never too late or too early to start cashing in on the power of compound interest.

I think it can be clearly demonstrated that the extra 18 years of time the young child gained by starting his/her saving habit early, earnt a whopping $238,000 in interest. Not bad for a child having the nous and fortitude to save a mere $10 per week.

Plus an extra $104,000 was also saved by only investing a total of $20,800 odd.

Another interesting note is the rule of 72 where about every 7 years your money will double at 10% pa, only with a one off investment and no periodic additions.

For example a one of initial investment of $10,000 at 10% pa calculated daily over 7 years will earn you $10,136.98 in interest.

If you simply added say $100 per week your total interest would skyrocket to $26,433.29 with your capital having also increased from $10,000 to $46,525.00.

So clearly, time, knowledge and discipline are keys to financial prosperity, good fortune and a bigger range of choices and greater enjoyment. Of course various taxes and expenditure would be in the mix, however this is a mere illustration only.

So to all you people who have spent too much over Christmas there is still hope, and especially to all those less fortunate children who perhaps have experienced a family breakup, now is the time to take matters into your own hands and start managing and investing your pennies wisely!

Now who said you didn't have a money tree growing in your back yard?

Happy compounding and Start TODAY!!!!

With love, kindness and peace
Michael