To really make the most of your money, it is important not only to save but also to invest those savings. The sooner you put your money to work and let it begin growing, the greater the sum you will have in the end. This is sometimes referred to as the "miracle" of compounding. Compounding seems like a miracle because your money grows at ever-increasing speed. The longer your money is invested, the more rapid its growth.
For example, if you invest $10,000 at 10 percent, the first year it will earn $1,000. If those earnings are added to your investment and allowed to compound, the next year you will earn $1,100 (10 percent on $11,000). The third year you will earn $1,210, the $1,331, then $1,464. At the end of seven years, your original investment of $10,000 will have growth to almost $20,000. Through compounding, you will have doubled your money in just a few years.
You can gauge the growth of your investments by using the Rule of 72. Divide 72 by the rate of interest you are earning on your money to determine how long it takes you money to double. For example, if you have money in a savings account that earns interest at 4 percent a year, it will take eighteen years for your money to double. (Rule of 72: 72 divided by 4 percent equals 18 years.) But if you invest your money so that it earns 9 percent a year, your money will double in only eight years (72 divided by 9 percent equals 8 years). And your money keeps on doubling. A $10,000 investment earning 9 percent will grow to $20,000 in eight years. Eight years later you'll have $40,000, then $80,000, then $160,000. Money left to grow over years and years can by your ticket to a lifetime of financial security.
You can use the Rule of 115 to see how long it takes your money to triple. Just divide 115 by the rate of interest you are earning.
Ginita Wall is the Co-founder of WIFE. She writes two weekly columns: Tax Talk, Suddenly Single. Worth Magazine recently named Ginita Wall, CPA, CFP, one of the top financial advisers in the country. She provides forensic accounting and financial guidance to men, women and their attorneys before, during and after divorce. She is the author of several books, including "Your Next Fifty Years" and "Our Money Our Selves". Visit her website at: www.planforwealth.com
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