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The Power Of Compound Interest: Maximizing Your Savings Potential

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  • Finance
  • 7 min read

Compounding interest is one of the most influential concepts in finance. While it may not sound like a big deal at first, as you look back on your savings growth over the past few years, you will see that a large portion of your wealth has been due to this simple concept.

When you invest money into an account, you are really just lending your money to someone else for a short period of time. That person can’t spend your money right away, so it has to be put into an investment account and later paid off.

The more invested the money is in the account, the more likely it is that it will earn some growth. The more investments you make, the more chance they will earn solid growth.

How to save money

Eliminate nonessential bills as much as possible. This means no cable bill, no phone bill, no electricity bill, and no grocery store or medical bill. You can make room by reducing payments on the things that consume your money most- housing costs, transportation costs, and medical expenses.

By keeping a small reserve fund in your bank account each month, you can be consistently upgrading your current savings setup. A small bank account will usually cost you only a few dollars per month in management fees.

If you can eliminate all but the most essential bills, you will be forced to focus on quality over quantity in your savings. This will allow you to grow your savings more quickly!

Try using a budgeting tool such as My Budget to help yourself and your family manage money.

Create a budget

Next, you need to create a budget in your head. This doesn’t need to be printed, it can be your mind-set. In the budget, you will account for all of your spending except for payments into the savings account.

You will have to subtract out spending from the savings account at the end of the month to see how much you spent.

That’s right – at the end of the month, you’ll have to subtract out everything that has been paid into your savings account except for what was spent. You’ll have to add up all of your payments and add them up to get your full cost, but then you subtract out any unpaid bills to see how much you saved.

A good way to create your budget is by using my money management tools on www.moneymanagementstrategies.com.

Create a savings plan

Once you’ve set your goals, it’s time to create your savings plan. This plan can be as simple as putting away money every day, or as extensive as giving yourself multiple monthly breaks to save.

No matter how you set your schedule, you’re going to need to put away money in your savings. In order to maximize your savings, you need to consider how much money you will need to live on, how much money you want to save, and what rate of return you want to have.

In his book The One-Household Plan: A Way of Life That Can Help You Stay San Francisco Longer, Dan Weil suggests setting up a program where one side of the household contributes a certain amount each week and the other side accumulates the remaining amount over a month.

This way, neither person is forced to save or give anything less than an adequate amount is saved.

Invest in bonds

Bonds are one of the best ways to invest in the markets. The government issues bonds to use as investments by banks and other institutions.

When you buy bonds, you are actually buying an asset that will appreciate in value when deposited into a bank account. The more you pay in interest on your bond investment, the more money you will keep!

Many stocks have a yield-yields style of bond. The higher the yield, the more attractive the stock is considered to be. When times are good and interest rates are high, everyone is willing to buy stocks.

If you notice your savings rate is lower than what it should be, look into new bonds. You can get some great returns by investing in old debt.

Invest in stocks

Despite the fact that bonds and stocks are different types of investments, most people confuse the two. This can be a costly mistake.

Bonds offer stability, but not always in the greatest proportion. As the market fluctuates, so do stock prices. Because stock prices change so frequently, it is more cost effective to invest in cash than in stocks.

Stocks will sometimes go up and down more than certain bonds, making it more difficult to save money. Because shares are less stable in terms of their value, it is important to keep an eye on your stocks when they are rising or falling to ensure you do not part with too much money!

It is wise to start small- start with a few dollars – before investing in stocks due to the risk. You do not need a large amount of money to invest in stocks, just enough to know what you are doing.

Use robo-advisors

With robo-advisors, you can create and manage a personal financial strategy that’s tailored to your needs. You can download a app and have it create an account for you with an account that tracks your investments, spending, and notes.

Wherever you are in your savings journey, you can easily update your plan according to how money is being spent or where the money is going. For example, if you are currently paying off large balance loans on your credit card, then using the app you could put up to another few months before you pay off the last loan.

You could also mix and match personal debt reduction with investing and leaving only spending dependent on your credit card debt reduction. This way, you keep improving your savings rate but also stay in control.

Keep your money in your family

While it is definitely beneficial to establish a lot of savings goals for yourself, it is even more important to keep track of your family’s savings.

Your family’s savings can be compared to a pyramid. Each person contributes their money at a low level, but as they gain income, they also invest money into property or investments.

As you can see in the picture above, if all members of your family save together, then eventually someone will save enough money to take care of them. However, if one member takes their responsibility seriously, then the rest of the family can help them out with just one lucky person.

This article will talk about some ways that you can help your family achieve financial freedom by contributing a little bit of their saved money into theirs.

Know the tax implications

If you are not yet prepared for the future tax implications of your savings, now is the time to start. While there are many ways to account for your savings, understanding how the tax laws work and how you can contribute to your future savings is important.

Many people save money into their 401(k) or 403(b) account. These accounts are typically limited to 4th and 5th anniversary periods, so it is possible to contribute more over a long period of time.

It is important to note that only money stored in your account during 2010 and 2011 was deductible from taxes. All other money in your account during 2012 and 2013 was tax-free.

If you were paying regular bills on your own, it is likely that you would have received recognition for the contributions you made to yourheitcenteraccount.

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