When my children entered high school, I told them the story of my two friends, “Mimi” and “Jdubs.” My husband and I worked with each child to save early–the earlier, the better. We opened savings accounts when they were young. When they entered the workforce, we encouraged them to save and invest. Saving is putting your money in a bank, which pays you interest for using it. Investing is buying something that may increase in value, like stocks or property.
Mimi and Jdubs were single friends I met in high school. Their stories highlight the best way to make your money work for you.
Jdubs started saving when she was 19. She saved $2,000 a year, or about $167/month. She deposited this every month until she was 26 when she returned to school.
My other friend Mimi started saving when she was 26. She saved the same amount each month as Jdubs but continued until she was 65. They both put their savings into investment accounts.
Jdubs saved $16,000, while Mimi saved $78,000. Let’s assume they both received 12% interest on their accounts and did not withdraw any. I understand that a constant 12% interest may be unrealistic, but for this example, bear with me. Who will have more money in their account when they turn 65?
Jdubs and Mimi’s Investments Over Time
Most people would guess Mimi will have more in her account because she added $62,000 more than Jdubs. They would be wrong. Jdubs would have over $2,200,000 in her account, while Mimi would have $1,500,000. Jdubs made her money work for her longer than Mimi; this is compound interest’s power. Compound interest is when you earn interest on your saved money and accumulated interest.
Compound interest is your money working for you rather than you working for money.
I love the idea of paying myself first, but I want to think about something other than savings, so I set up an automatic payment from my paycheck. It is not as much as my friends in the example, but every dollar counts. When or if I get a raise, I increase the amount I save. I encourage everyone to set their savings and investments on automatic. Make your money work for you rather than always working for money.
One of my military spouse friends, MB, had a unique way of saving. Depending on their duty station, she might find a job. They decided to save and invest her whole paycheck if she found a job. It did not impact their lifestyle if she could not get a job. Their savings grew because of their diligence to save whenever they could.
No matter when you start or how much you save, the most important thing is to begin.
Putting savings into investment accounts allowed them to grow faster. Investment accounts have more risks than savings accounts. Investment accounts are accounts that buy stocks. There are many types of investment accounts, which I will discuss in another blog.
As Jdubs and Mimi showed, saving is about starting early and growing your money. Remember, compound interest is your money working for you rather than you working for money. Start now and help yourself in the future.
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