Your Money: That daily Americano doesn’t earn you interest
April 3, 2013
I’ve never denied the fact that I am a numbers geek through and through. I enjoy numbers and I think they are fun and powerful. To illustrate this point, I wanted to share a few of my favorite concepts. Give these some thought, play around with them, and most definitely, share them with your kids and your friends! Why do I think numbers are powerful? Four words: time value of money. This may not be the simplest of concepts to illustrate, but once you get it, it will change the way you think about little purchases. Time value of money basically means that if you save money now, it will grow in future years because of compound interest. If you have $100 now, and it earns 5 percent interest, that $100 will become $1,000 or more in 50 years. That may not seem like a big deal, but if you can save $1,000 each and every year for those same 50 years, you will have saved $50,000 in cash, but that $50,000 will be worth more than $200,000 because of the interest you can earn along the way.Think it’s too hard to save $1,000 per year? That’s the equivalent of going out to dinner once a month, purchasing a fancy coffee a few days a week or eating lunch out twice a week. Not all that challenging when you break it down. So, the next time you are deciding between grabbing lunch at the local pizza place or brown-bagging it, how nice would it feel to have $200,000 cash ready for you in retirement?More powerful to consider, try sharing this strategy with your kids. If they can start a Roth IRA when they start working around age 16 and contribute $5,000 that year and for their next 50 years, they will have over $1 million when they are 66. Sure, it’s hard to get a kid to look that far ahead, but it’s worth a shot and at least you can say you tried. If you do happen to catch their attention, they will most certainly thank you later. My dad had this conversation with me when I was 10, and I assure you, it was a life-changing conversation.Want another trick to share with your kids? Grab some paper and a pencil and try the double-a-penny trick. Start with one penny on day one, double it on day two to two pennies; day three it becomes four pennies, and so on. How much do you think it will be worth in 30 days? I’m not going to post the answer here, but I will post a demonstration on my website in case anyone wants to check out the answer. Trust me, it will shock you.There is power in knowledge, and that most certainly extends to numbers. Play around with these concepts and you will see that a little savings can go a long, long way. Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit http://www.cpamichele.com.
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