Creating a sound financial foundation for you and your family is anything but easy. With low-interest rates as an incentive to borrow more and even lower interest rates on savings accounts, is it any wonder that it’s tough to retain the discipline to save? Here are five thoughts that may help.
1. Pay yourself first
Treat saving money with the same care you pay your bills. Take a percentage of everything you earn and save it. Using this technique can help build an emergency fund and keep you from living paycheck to paycheck.
2. Know and use the Rule of 72
You can roughly calculate the number of years compound interest will take to double your money using the Rule of 72. Do this by dividing 72 by your rate of return to estimate how long it takes to double your money. For example, 10% interest will double an investment in 7.2 years; investments with an 8% return will double in nine years. Use this concept to understand the power of saving and investment.
3. Use savings versus debt for purchases
Unpaid debt is like compound interest but in reverse. For instance, using a 12% interest credit card to pay $1,500 for home appliances costs over $2,000 if paid back over five years. The result is that you have to work harder and earn more to pay for the items you purchase. A better idea may be to save and then buy your dream item.
4. Understand amortization
When a bank loans you money, it gives you a specific interest rate and a set number of years to pay it back. Each payment you make contains interest as well as a reduction of the amount owed, called principal. Most of the interest payments are front-loaded, while the last few payments are virtually all principal. Making additional principal payments at the beginning of the loan’s term will decrease the amount of interest you pay to the bank and help you pay off the loan more quickly.
5. Taxes are complex and require help
Tax laws are complicated. They are made even more complex when the rules change, often late in the year. Even worse, the IRS is not in the job of telling you when you forget to take a deduction. The best way to stay out of the IRS spotlight AND minimize your taxes is to ask for help.