The Magic of Compound Interest

Compound interest is the magic ingredient in any financial plan.  But what exactly is compound interest?

Compound interest is interest paid on an investment; that interest is then added to your original investment (reinvested) and earns interest thereby earning you interest on your interest. This is very powerful stuff especially if you get paid interest every month.
Here is an example:

You make a lump sum investment of $5000 and receive 10% interest compounded monthly (every month your interest is added to your initial $5000 thereby becoming available to earn interest) this is what your investment will look like in:

10 years = $13,535
20 years = $36,640
45 years = $441,770

Now the key to the whole thing is to keep adding your interest earned back into your savings account so that it can also earn interest.  Most investment and savings accounts will do this automatically but be sure to ask and make sure.

In todays markets you'll be hard pressed to find a savings account (mutual, bond or otherwise) that will pay 10% interest.  Don't let this be an excuse for not saving.  Shop around and find an account with a high interest rate that is compounded regularily.  FYI - those fractions of a percentage point make a difference!

Remember to research, research and research some more.  Go online to your bank site then armed with a general understanding of your options head into the bank and talk to an account manager.

You're going to find that most of the high interest accounts won't be available to you because of your age (assuming you are a minor).  Keep researching.  Find the account you want to place your money into.  Make sure you have a VERY good understanding of how that account works and the risks involved then go see your parents.

Prove to your parents that this is the best place for your money.  Show them that you know what you're talking about.  Show them your savings stragety. 

Maybe ... just maybe ... they will consider opening that account for you 'in trust'.  That simply means that the account is in both your name and the name of your parent(s).  They have the control over the account which will be turned over to you when you reach the age of majority. Of course, there is a bit more to it than that but if you think it may be an option then you know what to do ... research!

A quick recap:
  • Compound interest is the key to any successful financial plan
  • A fraction of a percentage point makes a difference
  • The more often your money is compounded the better
  • Use your parents to open a 'trust' account if it is best for you
Just as a reminder of the last post - what you do with your money is YOUR decision.  Be 100% sure before you act because there is no one to blame but yourself.

Here is a link to an online compound interest calculator.  Use it to try different scenieros.  Search 'compound interest calculator' online and explore some other calculators and learn more about how compound interest is calculated. Your bank site may even have a compound interest calculator there.

Research The Banks

Informed decisions can only be made through research.  Research is the key to everything and when it comes to your money you can't be lazy about it.

If you've been following along with this blog then you have already put into action some of the strageties for saving money and you are starting to accumulate some coins in your piggy bank.  Now is the time to start thinking about what you are going to do with those coins when you finally open your piggy bank.

You need a savings account at one of the local banks.  I know what you're going to say - 'I already have one' - but is it the best one for you?  Don't answer that!  Do your research first then give an informed answer.

All the banks have the same general purpose - that is to house money.  Their business is money. They lend it to people who need it and store it in a safe environment for everyone else.  BUT - all banks are not created equal.  Remember that!

So how do you go about researching banks?  Start in your home town (since that is where it will be easiest to do your banking).  Go into the bank and ask for information on their savings accounts that would be available for you.  Get pamplets and flyers, etc.  Do this for every bank in town.

Go home and review all the information. Go to their websites and research some more about the account options. Pay particular attention to the differences.  Make a check list of everythng one bank offers then compare it to the other banks. For example your list may look something like this:

Description of Service           Bank #1          Bank #2          Bank #3         Bank #4
  • interest rate
  • insurance
  • fees
  • accessability
  • locked in
  • etc.
  • etc.
  • etc.
When you have a comprehensive, detailed comparision sheet made then you can make an informed decision about which bank and account type is best for you.

It is very important that YOU make the decision - no one else.  This is your money that you want to save. You are the one that stands to benefit (or loose!) from your decision.  So research, research and then research some more, until you are comfortable with the decision you made.

From this point on you, and only you, are responsible for the decisions you make.  If you make a good decision you will take all the credit and reap the benefits.  If you make a bad decision ... well ... you only have yourself to blame.

NOW answer the questions - 'Do you have the best savings account you can get?' and, 'Are you comfortable putting your piggy bank money into that account?'.  If you answered 'YES' to both those questions then open the account and start saving.

The Company You Keep

Are you familiar with the phrase, 'you are what you eat'? I'm sure everyone has heard that said at least once. Probably by your parents when you're diving into the potato chip bag. The general meaning of the phrase is, if you eat healthy foods you will be healthy but if you insist on constantly eating 'junk' food then you will not be as healthy.

The same idea applies to the company you keep. Really. If you are constantly in the company of people with little or no ambition to improve themselves then you will struggle to find the motivation to improve yourself. On the other hand (this is the one you should be paying attention to!) if you surround yourself with successful people and people who are constantly working to improve themselves then you will be more inclined to better yourself. What do you think of that theory?

You learn from other people in both a conscious and unconscious manner. Sort of like osmosis. Information will begin to be absorbed by your subconscious. The brain then filters that information through into your everyday activities. So wouldn't you like to be surrounded by positive, productive information rather than the negative 'I can't do it!' type?

As a teenager you don't have a whole lot of control over who you associate with. You go to school and are in a classroom situation where you are in close contact with teachers, aides, parents and other students. But you can still take some control.

It doesn't take long to figure out which kids in the class are the slackers and which are the workers. The workers are the kids you want in your social group. They take their education seriously and they are the kids that will go on to make something of themselves in the future. These are the kids with the million dollar attitude even if they don't realize it yet.

Don't just limit yourself to school. Find successful, ambitious adults and work your way into their circles. For example, if you are looking for a summer job look for employment with a successful entrepreneur and try to place yourself close to your boss. Ask questions and learn. Remember, your boss didn't become a boss by sitting in the back of the classroom, learn from his/her example.

There is so much information surrounding us and most of it is free for the taking. Surround yourself with knowledgeable, ambitious people and start gleaning some of that information. Learn from the examples of others.

The company you keep could make all the difference.

The Million Dollar Attitude

If you're following this blog then I'm going to assume that you are looking for information that will help you to become financially wealthy. Certainly a worth while endeavor. After all, the world runs on money, the more of it you have the more you can do.

Achieving your financial independence (becoming rich!) requires more than lucrative investment windfalls, inheritances or lotteries. It requires the right attitude. I'm not kidding. If you talk to any self-made millionaire they will tell you it was as much attitude as hard work that made them rich.

I'm not talking about the nose-in-the-air, snub the peasant kind of attitude either. I'm talking about the kind of attitude that will make you rich! The million dollar attitude.

You need to believe in yourself. Believe in your ability to become rich. Believe that everything you do is taking you one step closer to your ultimate goal of becoming a millionaire. Once you believe the rest will start to fall into place.

Tell yourself, everyday, that you are going to be a millionaire. Then as the day progresses keep telling yourself that. Think like a millionaire and you will become a millionaire.

As soon as you believe in yourself you will automatically start taking steps to achieve your goal. When you believe that you can become rich then you will find it easier to save money. It will be easier to say 'NO' to the frivolous spending. You will become more money conscious. You will start taking steps to educate yourself on finances.

Attitude is the biggest obstacle in your path to becoming financially independent. Over come the 'I can't do it' attitude and adopt the 'I can do it' attitude then nothing will stop you.

Paper Mache Piggy Bank

In the last post I told you about some of the ways you can scrape up some extra money to get you started saving. I also mentioned that the coins and extra cash you manage to gather should be collected in a piggy bank (one that has to be broken to open!)

I want to take a minute now and explain why I feel a paper mache piggy bank is the best option.

COST. This is probably the first reason I would choose a paper mache piggy bank. It's cheap to make. If your goal is to save money (and it should be!) then to spend money to buy a piggy bank that will be broke in the end seems counterproductive.

EASE & FLEXIBILITY. It's easy and you can make your piggy bank into whatever shape you choose, that's flexibility.

CHANGEABILITY. Is that even a word? My thinking here is that if you change the color or style of your bedroom (where I presume you will be keeping your piggy bank) you can change the color of your piggy bank to match.

So there your have it - the 'why's' of building a paper mache piggy bank.

Now for the 'how's'.

Give some thought to the finished shape of your piggy bank. Do you want a traditional pig? A star? Ball? Face? Remember you will have to break your piggy bank open to get at the money so simple is usually better - unless you have lots of time on your hands.

A balloon makes an excellent body. Blow it up to the size you want. Now using other materials (such as cardboard, paper cups, etc.) construct the features (legs, head, etc.) and tape them to your balloon. At this point it's not going to look like much, just get the general framework done.

Mix equal amounts of warm water and white flour together with a whisk until you have a very smooth batter (similar to a pancake batter.) Add more water or flour as necessary. **It is important to have a very smooth batter. Set aside.

Cut strips of old newspaper about 1 inch wide by 7 inches long. The actual size really doesn't matter as long as you can work with it easily without it wrinkling or folding over on itself.

This is the messy part so make sure you have enough room. Take one strip of paper and slide to through your flour mixture. Pull the paper through two fingers to remove some of the batter. Now place the wet paper on your frame. Keep adding wet papers until you have covered your frame evenly no more than two layers deep. Mold the papers so that your piggy bank begins to take on the shape you planned.

Now let your creation dry for at least a day. It's important that it dries thoroughly between applications of paper so that it won't rot.

Every day or so, (depending upon how long it takes to dry) apply another layer or two or paper. The more layers you add, the stronger your bank will be. You may need to add extra layers at stress points (where the legs attach to the body, etc.) so your piggy bank won't break when it gets heavy with coins.

When you feel you have enough layers then you need to add a white paper layer for the final layer. I use white paper because it covers the ink from the newspapers and it is less likely you'll have newspaper showing through your paint covering. The white layer needs to be as smooth as possible to make the finishing steps easier.

As soon as the white layer is dry you can start decorating your piggy bank. Use whatever you want. Colored crepe paper, glitter, jewels, paint - the sky is the limit. Be creative.

When your decorating is complete all that is left to do is put a hole in the top big enough to drop your coins through. Do this with a sharp knife. Don't put any other holes in the bank (don't put a hole in to get the money out!)

Congratulations! You just made the most important tool in your financial management toolbox. The Piggy Bank.

Where To Find Money

Before we can even start to invest money we need to come up with some to invest. This is not as hard as it seems. Here are some easy ways to start gathering money to invest.

Keeping in mind that this blog is for teenagers the ideas presented are intended for teenagers although adults may learn something new too.

The first thing to do is get yourself a piggy bank. You can make it out of paper mache (I'll explain how to do this in my next blog) or purchase a new one it doesn't matter the important thing is that you have one. Make sure your new piggy bank is the type that you have to break to open - this will prevent you from 'borrowing' from your savings.

Save your change. Whenever you make a purchase at a store pay with paper money. Take the coins you receive back and put them in your piggy bank. Do this for everything you buy and do it every time you make a purchase, you will soon have money to invest.

Save 50% of any money you make. While you're living at home you have few expenses if any at all. Most of the money you earn through a part time job, allowance or gifts you probably spend on frivolous stuff (things you don't really need.) So before you head to the store, pull half that money out and put in into your piggy bank.

Sacrifice. Relax this should be almost painless. Do you have a habit that is costing you money? Do you buy a pop and chocolate bar or chips regularly? Maybe have lunch at the cafeteria everyday? Smoke? Take the amount of money that your habit costs you in one day and put it in your piggy bank then skip your habit for that day. This is good in two ways, you are weaning yourself from a potentially expensive habit and you are saving money.

Do you need it? Ask yourself this before you buy and you could save yourself a bundle. Cell phones are a huge money grab. Ask yourself if you really need one? Do you need all the bells and whistles? If you answered yes that's fine. Now ask yourself if you are on the most economical calling plan? There are lots of different plans out there and sometimes deciding on the right one takes time. First decide how you are going to use the phone - emergencies only, test and talk to friends, keep in touch with parents, etc. Next, figure out roughly how many minutes you will use the phone. Then review the different plans and find the most economical.

Cell phones are just one example. You could the same question about a vehicle or fashion. If you don't spend the money then it's available to save.

Parents. You're living at home right? If there is something you want (like a cell phone) and you can justify the need for one, then come up with a convincing argument and present your case to your parents. They may just buy it for you. It's worth a shot.

These are just a few ways you can scrape up some extra money without really doing anything at all. You simply have to combine a positive attitude with the desire to save some money and you'll be well on your way.

Young People and Money

For parents I don't think there is anything more frustrating than trying to explain the value of money to children (of any age!)

For children especially teenagers, that do have some concept of the importance of money and saving for the future the frustration comes from the limited ways available to make that money grow.

Most kids put some money away into a savings account only to see a measly fraction of a percentage point earned in interest (if that!) Chances are after a couple years of little or no return your child will say, 'why bother?' and spend that money. Can't say as I blame them.

The key to avoiding this is education and alternatives to the low interest savings accounts. Which brings us to the purpose of this blog - to provide some alternatives and creative money management tips for teenagers.

So bookmark this site and check back regularly. The first step to a successful (and hopefully profitable) money management plan is education.

Remember different people have different ideas and different ways of making things happen. Some work better than others but you can learn something from all of them.