Honest Abe and the Rule of 72
The old saying predicts "See a penny pick it up and all day you'll have good luck." In honor of the February 12 birthday of Abraham Lincoln who appears on that coin, Debt Matters takes a look at the importance of saving your pennies so that you don't need to rely on being lucky in your finances.
Be Like Honest Abe
Take a hard, cold look at your expenses and see if there are costs you can reduce or eliminate. Be brutally honest about your financial future and how much money you will need for such goals as such as buying a home, putting children through college and retiring. Not only do savings help you achieve goals and prepare for emergencies, but by creating a savings plan you'll have a financial roadmap that helps you get from where you are now to where you want to be.
Take an interest in your future
In a recent survey of American saving habits, more than one in four people surveyed reported they did not have a savings or money market account. Accounts with compounded interest allow you to earn interest on the money you put in the account as well as on the interest it earns along the way. When shopping around for the best rates, compare the amount of interest you will earn on a yearly basis, the APY, rather than the interest rate to get the best deal.
The rule of 72 is a good rule of thumb
The hardest part of savings is waiting as your money grows. The rule of 72 is a way to estimate how long it will take for your money to double. Simply divide 72 by the interest rate and that is the length of time in years it will take to double your money, on average. For example a savings account paying two percent will double you money in 36 years while an investment offering five percent will need only 14 years.
A penny saved is a penny earned
There are many ways to save and you may wish to spread your risk among different types of saving instruments and investments. The National Credit Union Administration and the Federal Deposit Insurance Corporation insure savings kept in NCUA credit unions and FDIC insured banks. Other saving instruments that ensure your savings will not lose value are club accounts and certificates of deposits. Investments such as stocks and bonds or equity you create buying a home or owning a business may offer more interest or income but they are not guaranteed to hold their value and return what you put into them.
The money and your future are both in your hands
It's up to you to decide how much money you want to accumulate, how long you can keep the money invested before needing to use it and how much risk you are willing to take. Whatever you choose, the sooner you start, the sooner the pennies will begin to add up.
