Wednesday, November 02, 2005

Compound Me Up!

Piggy Bank

Wallet Talk Wednesday

Compound Me Up!

Good to be back online and blogging…DSL finally got activated...for this portion I’ll talk about compounding and increasing investment savings from your budget.

The best way to increase investing or saving portion of your income is to make sure you budget what you need and remove those that you don’t. Because some of you folks have gotten used to having a standard of living you might actually think you can’t live without some of your stuff. Guess what… you can live without them...really you can.

Currently we have reviewed our bills and had these outcome:
1. Cell phones – Needed for emergency but not a necessity so plan was reduced to minimum. $80ish for 3 lines.
2. Satellite – It’s a good thing to have and we have gotten used to the shows but not a necessity so no satellite for now. Save $50ish a month.
3. DSL – prices are low that it’s not worth to downgrade to dialup and necessity for business and personal sanity. Other than blogging and surfing I get news and financial information online instead of traditional newspapers.
4. Phone – Necessity for emergencies, not expensive too.
5. Starbucks/Coffee funds – Nah we are not coffee drinkers and we’re not like YOU…:P addicted to Starbucks. I should have bought their stocks 3 years ago ;) We have a gift card given to us so we get free coffee until it runs out.
6. Dining out – Yes, wifey and myself would rather spend money on FOOD than on other things. Well wifey does spend some on furniture and stuff to make the house look good so it’s all good.
7. Gym – Well health is important and I’ll be going back to the gym probably tomorrow too, I’m not feeling too fatigue from the move anymore. That’s $19/month.
8. Magazines – We’ve cancelled all our subscriptions months ago so that’s around $40ish a month in savings.

So I guess all in all we only have $100-$120 Plus utilities, food and trash, so WORSE case scenario a running monthly bill of $400. Savings of around $90 a month taken from the stuff we cancelled.

The great thing about investing early (market/savings/bonds/etc.) is the “Compounding Effect”. It’s basically better to save early and get the benefits of compounding

I put this $90/month or $1080/yr. in an account/investment that earns 4% per year. In 6 years I would have what vs. if I kept it yearly in my pocket?

Assuming that the addition that is added for the year will not accumulate interest for the period. There are various formulas for compounding out there depending on your situation and schedule of contributions but this one below is the most simple one I can think of right now so I’m going to use it :P

$90*12 = $1,080 to be given yearly at 4%.

End of 1st year you will get $1,080 + 43.2 (4% of $1,080)= $1,123.2
End of 2nd year you will get $1,123.2 + 44.928 (4% of $1,123.2) + $1,080 = $2,248.128
End of 3rd year you will get $2,248.128 + 89.925 (4% of $2,248.128) + $1,080 = $3,418.053
End 4th year you will get $3,418.053 + 136.722 (4% of $3,418.053) + $1,080 = $4,634.775
End 5th year you will get $4,634.775 + 185.39 (4% of $4,634.775) + $1,080 = $5,900.165
End 6th year you will get $5,900.165 + 236 (4% of $5,900.165) + $1,080 = $7,216.17

So because of compounding I would have $7,216.17 instead of having $6,480 if I kept the money in my pocket.

Let me reminded you that you can loose money or your capital in some investment vehicles so educate yourself before investing in anything.
Good Luck and EnjoyLife!


Post a Comment

<< Home