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” The most powerful force in the universe is compound interest” ~ Albert Einstein
It’s easy to ignore the quote. It takes a great deal of time to see any results from compounding interest. So much so that many don’t bother at all at giving it a chance to work for them. I was one of those people for the longest time.
Growing up during the 90’s, I didn’t bother with a savings account. The APY at my local bank was (and still is, actually) abysmally low. As a teenager, I didn’t really have any money to put into a savings account. So, the thought of putting it away for such a low return and possibly having to pay a fee to withdrawal….well, I just didn’t see the interest (pun!). But, now that I’m beginning to make a decent income, I’m looking for more ways that my money can work for itself.
So far, I’ve managed to open up an online savings account with a relatively high yield of 4.5%. The results so far have been addictive. Every month I get an email letting me know that “Hey, we just gave you $XXX, that you didn’t have to do a thing for!”
And, it’s easy to see that if I continue to repeat this process, eventually it will yield a recurring substantial amount of money that involves little effort on my part.
My next goal is to try increasing my return by investing some of my income in mutual funds. In particular, I’d like to invest in the Janus Overseas (JAOSX) mutual fund. According to Schwab, it’s a High Return, High Risk mutual fund (which is fine by me since I’m pretty young) with No Load. Here’s a screen-capture of the JAOSX’s yearly returns:
Even if it doesn’t have a return of 50 or 30% next year, 16.5% is substantially higher than 4.5% in the long run. Plus, it will be a nice complement to my growing number of investments.
So, what are my current guidelines for investing? (I say “Guidelines”, because there are always exceptions. e.g. Customer Service vs. No Customer Service or High Quality vs. Low Quality, etc.)
- Invest in appreciating assets - Don’t leave all your money in a checking account with little to no yielding interest. Find some way to invest your money. It doesn’t matter whether it’s an index fund, mutual funds, stocks, or bonds. Sure, in some cases you may only gain $10/month, but that’s over $120/year (or $122.50 on an initial balance of $2666.70 with an APY of 4.5% and no additional contributions….to be exact) and you didn’t have to do anything to get it!
- Separate your Savings - Try to have your savings account at a separate bank than your checking account. Doing so has been shown to help in growing your nest egg because it’s not as easy to make withdrawals (…actually, it is pretty easy with some banks).
- 401k First - Studies show that you can save more money by increasing your 401k income deferral as opposed to paying more towards your mortgage. This is because the money being invested in your 401k isn’t taxed until you you start withdrawing it(same with the interest it accumulates).
- Say “NO!” to assets that quickly depreciate - Nothing pisses me off more than to purchase something only to find out it’s worth much less after I walk out of the store. If you aren’t able to keep the outstanding balance of a purchase below the actual value, then perhaps it wasn’t really a deal after all.
- Research Everything - Their are so many online tools available for free that it’s silly not to do any research. Find out what investment strategies work best for you and have at them.
- Don’t Trust Everybody - Not even the cool talk of a guy named Zach. Do your own research and invest carefully.
It takes a lot of hard work and time to build up your assets, but it only takes a second to lose your ass.
