by Jason Alderman
Until you get in the habit, putting aside savings is never easy. But the sooner you start, the sooner you’ll start seeing results.
When you reinvest interest earned on savings accounts or other investment vehicles, the interest grows the account’s value much faster than if you withdrew it.
You needn’t start with such a large initial investment to reap big rewards. Say you’re 21, start with a zero balance, save $100 a month, earn six percent annual interest and reinvest the interest. After 10 years you’d have $16,470; and $46,435 after 20 years.
Timing is important. Postponing your savings by only two years would reduce your balance in 20 years to only $38,929 – more than $7,500 less.
Another way to accelerate earnings is to take advantage of tax savings offered by retirement savings programs like 401(k) plans and IRAs. With a 401(k), you can contribute up to $16,500 a year on a pre-tax basis. This lowers your taxable income and allows your account to grow tax-free until you withdraw the money at retirement.
Regular IRAs offer similar pre-tax advantages; or, you can contribute to a Roth IRA using after-tax dollars and your earnings will be completely tax-free at retirement.
The riskier an investment, the greater your potential gains – or losses. Savings accounts offer lower interest rates in exchange for minimal or no risk, whereas stocks potentially can earn double-digit investment rates over long periods of time, but at much higher risk.
Inflation measures the rate at which goods and services increase in cost over time. If your investments earn two percent interest but the inflation rate is three percent, the net result is a one percent loss.
Keep in mind that no matter how much interest your investments earn, if you carry forward credit card or loan balances (aside from tax-deductible mortgage interest), you’ll be eating into whatever profits you might make.
For more information and tips on managing money, visit Practical Money Skills for Life’s site www.practicalmoneyskills.com.