The Most Powerful Force …

I am working on a book for young people to help them acclimate to life after high school. This is an excerpt from that project. If you have a son, daughter, niece, or nephew in this age group, this may be good information to pass along to them.

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 “The most powerful force in the universe is compound interest.”

                                                – Albert Einstein

Would you like to know the secret to success? In a single word, it is discipline. 

Savings combined with compounded interest can make any person rich.  The key is in discipline.  As with any program you have to design your savings plan, determine your monthly investment, and then you have to stick with the plan.

More than likely, you have heard your parents talk about how important it is to save.  The problem with many families is that it is nothing more than talk; for a person to learn how to save effectively they must actually see savings in action and they must be able to measure the results of the saving program.

For many, the idea of saving started with a twenty-five cent allowance.  Their parents gave them quarter telling them to save a nickel from each quarter.  The idea that parents had was to train their child to save a portion of every quarter.  In theory, it is a fine idea.  After a whole year collecting quarters, the child would have $13.  Of that, if the child saved a nickel a week, they would have saved $2.60.  Oh yes, this is without interest.

To learn effectively how to save, you have to see some real results.  You also have to understand concepts of saving – with and without interest.  You should also get a grip on the idea of simple interest compared to compounded interest. If you are saving for the short term, simple interest is fine.  On the other hand, if you are saving for some serious jack, you definitely want to get involved with a bank or credit union offering compounded interest savings accounts.

Many people do not understand savings, savings accounts, and interest well enough.  For example, if you save $100 a month underneath your mattress, after 12 months you have $1,200.  After you do all that saving, if you took your money down to the bank and put it into an account with a simple interest of 3%, at the end of another 12 months, instead of $1,200 you would have $1,236.  Thirty-six dollars is not a lot of interest, but as some have said, it is better than nothing.  So, after 24 months, you would have $1,236, or a savings of approximately $51.50 per month.

Now, instead of saving $100 a month for one year and then sticking a lump sum into a simple interest bearing account, let’s take that $51.50 and save it leisurely over 24 months.  In other words, instead of struggling to get $100 a month into savings during the first year, take the smaller amount of $51.50 a month for 24 months and place it in a compound interest account.

Instead of $1,236, your savings compounded at an interest of three percent for those two years will yield a total of $72.20 in earned interest.  This is more than double the interest earned in a simple account.

Without a doubt saving money in a compound interest bearing account is the most important thing you can do.  If you can purchase whatever you want with cash, you can save a great deal of money in the end.

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© 2011 J. Clark

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