Eating In: One Way to Set Aside Money for Investments

One of the main objections people have to building an investment portfolio is that it takes every penny they have to get by. Most of us waste more money than we realize especially when it comes to eating out and entertainment expenses. Try this strategy for a month and see how much money you can save in a thirty-day period. If you tend to each out three or four times each week, add up the amount you spend on those meals last month. This can usually be done by looking back at your credit card statement. Calculate an average cost that you pay for each meal out. Next, limit eating out to one night per week. Choose a place that you enjoy, but one that also happens to offer meals at moderate prices. For all those other nights, prepare your meals at home using whatever is in the pantry. This may mean getting a little creative, but since that food is already paid for, why not put it to good use? Each night that you eat in, put the equivalent of an average meal out into a glass jar. Include what you would’ve left as a tip! At the end of the month, empty the jar and total the contents. Place the money in an interest bearing savings account and you’ll quickly accumulate the funds needed to participate in a bond issue, buy a few shares of stock, or secure a low risk investment that will serve as part of the foundation for your financial...

Think You Can’t Save Money? Think Again!

A simple, quick tip to help yourself start saving money when you don’t know where to start.

Creating an Emergency Fund

The core principle behind any emergency fund is having an account with money that is generally untouched and will only be used when it’s most needed. Such emergencies can include any major unexpected expense, but often emergency funds are used during times of illness to cover medical bills, or when a person loses their job. In any of these cases, having money set aside can provide peace of mind when you need it most, during an already stressful situation. Why Keep an Emergency Fund? Financial stress can take a big toll on your personal life and the lives of your family. Many relationship problems arise whenever there are issues with finances, and if you don’t have a cushion set in place to fall back on, then things will only get worse. Having an emergency fund as a cushion will ensure that you stay out of debt whenever that unexpected expense suddenly shows up. It’s wonderful to know you have your expenses covered in the event of an emergency, because the next alternative for many faced with the loss of their income, is to rely on their credit cards, which leads to difficulty down the road. Once they finally do find a new job, then they might find themselves stuck with months or years of debt piled up which, considering the interest rates on credit cards, are a much tougher burden than regular saving would have been. How Much to Save? To figure out how much money you should set aside for this fund, you should first realize that it has a great deal to do with your particular situation. A good place to start would be to calculate anywhere from two to five months of your total living expenses. Once you have accumulated enough to survive for that long, then you can relax and slowly work your way up from there. The two to five months is a base value, but if...

The Rule of 72

When investing or saving money, people often have a goal in mind of how much money they would like to save over a given period. The Rule of 72 is a simple way to approximate the amount of time it takes, at a particular interest rate, for an investment to double in value. It can also be used to determine the interest rate required to double your money in a particular amount of time. Let’s say you want to know how long it will take to double your money at a 5% interest rate. Divide the number 72 by your interest rate 5 (72/5) , to arrive at 14.4. It would therefore take you about 14.4 years to double your money at an interest rate of 5%. The exact amount of time required to double your investment depends on how frequently interest is compounded. Learn more about compound interest here. If you know how long you would like to save for, but you are not sure what interest rate would be required to double your money, you can use the rule of 72 in reverse to calculate this. Instead of dividing 72 by the interest rate, this time you would divide 72 by the number of years you want to save for. Let’s say you want to double your investment in 7 years: dividing 72 by 7 gives about 10.3 . You would require an interest rate of 10.3% in order to double your money in 7...

What is Compound Interest?

When you deposit your money into a savings account, the bank pays you for the privilege of holding on to your money. The bank will pay you interest as a percentage of the initial sum you deposit (called the principal amount). The exact amount of interest received depends on the amount of principal, and the interest rate that the bank is willing to pay. For example, if you start with $1000 and the interest rate is 3%, every year you will earn $30 ($1000 x 3%). Therefore after 12 months, your $1000 would rise to $1,030. Note that 3% is a little higher interest than you’ll be able to get from a bank account in 2013, but the numbers work nicely as an example. It’s possible to earn higher returns with bonds, dividend-paying stocks, and other higher risk investments. But the bank doesn’t just give you one single interest payment every year. Typically, they pay interest once a month, by dividing the annual interest rate by 12. So rather than getting 3% per year, you get 0.25% every month. On our $1000 principal, that’s $2.50. What’s the difference? It all works out the same, right? Maybe you get some of the money a little earlier, but in the end, $2.50 times 12 is still $30. Well, not exactly — there’s one important factor we’re not considering: compound interest. Instead of just paying you interest on your initial $1000 deposit, you’ll also get interest on the interest you’ve already earned on your principal! How does this work in our example? After the first month, you’ll have $1002.50. That’s not much more than what you started with, but the second month, you’ll earn interest on $1002.50 instead of $1000. At first, the difference is hardly enough to notice — less than a penny the second month, and after the first year, that $1000...

Brown Bag it to a Cool Half Million!

One great way to save money is by bringing your lunch to work. Over the course of a career, you might be surprised how much this can help you save! But it can’t really be that much, can it? After all, take-out lunches are pretty cheap. Well, that’s true, they are, but let’s just do the math for fun. The price of a take-out lunch varies wildly depending on what city you’re in and what type of food you’re buying. But let’s say an average amount is $8. A brown-bag lunch of a sandwich, yogurt, and fruit (hey, this lunch-bringing has the side benefit of also being healthy!) can be assembled for $2 or $3. We’ll assume that bringing your lunch saves about $5 per day. $5 per day is $25 per week. A little more than $100 per month. Not a bad start, but how do we get to half a million from there? The Long Term Plan Let’s take this to the next level. This is extra money, so we’re going to sock it away for the future, and do this regularly. Your $100 a month is now $1,200 per year. Now, let’s assume a relatively young person has about 40 years to work before retirement. Let’s say you sock away that $1,200 in a jar underneath your bed. When you retire, that jar would have $48,000 in it. Not too shabby, but there’s a reason we don’t keep our money in jars under beds, and it’s not just to keep burglars from getting ideas. The Miracle of Compound Interest When you put your money in the bank, you’re actually loaning it to them, and they pay you for the privilege. That’s called interest. The interest gets added back into your account, which the bank is still borrowing, by the way, and so they pay interest on that. That’s called compound interest, and it makes...