The magic of compound interest...
Know the Difference
The difference between working for your money and having your money work for you is a very important concept. Working for your money is actively working for money from a job to monetary gifts. Having money work for you is letting it grow and accumulate wealth passively. Sounds easy right? Then why isn’t everyone doing this? Why isn’t everyone rich? Let’s start with the easiest way to get started, you just have to be 18 years old.
Now it's time to pick your account. This could be a Roth IRA or brokerage account. A Roth IRA is a retirement account that allows a user to put post-tax (after you get a paycheck your net income or the take-home amount is the post-tax money. This is the money you get after all taxes toward the government is paid.) money and grows tax-free without taxes when taken out. The drawbacks of Roth IRAs include not being able to take out your money until 59.5 years only and a limit of $6,000/ year. A brokerage account is another way to invest money. Unlike a Roth, money can be taken out at any time and there is no limit of money put in. Money put in is post-tax and will again be taxed when taken out which is a big drawback. These accounts have the power of compound interest and this is the reason these accounts are better than saving accounts.
Compound interest allows money to grow upon itself. Let’s look at a common scenario and help illustrate this. The simplest way for beginners to invest is through a Roth IRA. Putting money into a simple S&P 500 index fund earns an average of 10% each year. Calculating in 3% inflation the take-home is 7% annually. Within a Roth, IRA money cannot be taken out until 59.5 years old. With that let's see how money can work for us!
Years to Grow
Starting at age 18 just putting simple amounts monthly can grow to an extreme amount. This is great but with this method, time is on your side.
Let's see how time allows money to grow.
Years to Grow
The Big Takeaway
Start early! Compound interest is great in that money can grow to extreme amounts, however, the drawback is that it needs time to grow. Roth IRAs and brokerage accounts are perfect places to invest your money. Places that hold these accounts include Fidelity, Vanguard, Charles Schwab, and more. For more questions and guidance contact Master Money here. Starting early is the best way to get started and can be with as little as $10. Saving is important but investing is the difference between those that work for their money and have money work for them.
For more budgeting concepts check out the 'Concepts' category under the blog. Download our free Master Money Monthly Budget and Yearly Overview in the templates tab and the blog category ‘Guide’ provides information related to the free templates. For Personalized Budgeting, services check out the support link.
Master money so money cannot master you.