Category: compound interest

Can You Answer These Basic Money Questions?

The NY Post published an article Most Americans can’t answer these 4 basic money questions.   They questioned “Millennials” and “Boomers” to see who were most knowledgeable about investing.
Here are the questions – see how well you do.

  1. Which of the following statements describes the main function of the stock market?
    A) The stock market brings people who want to buy stocks together with people who want to sell stocks.
    B) The stock market helps predict stock earnings
    C) The stock market results in an increase in the price of stocks
    D) None of the above
    E) Not sure
  2. If you had $100 in a savings account and the interest rate was 2 percent per year, after 5 years, how much do you think you would have in the account if you left the money to grow?
    A) Exactly $102
    B) Less than $102
    C) More than $102
    D) Not sure
  3. If the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year, after 1 year, how much would you be able to buy with the money in this account?
    A) More than today
    B) Exactly the same as today
    C) Less than today
    D) Not sure
  4. Which provides a safer return, buying a single company’s stock or a mutual fund?
    A) Single company’s stock
    B) Mutual fund
    C) Not sure
    D) Not sure

The correct answers are

  1. A
  2. C
  3. C
  4. B

If you had trouble getting the right answers you could benefit from the guidance of a good RIA (Registered Investment Advisor).

Would You Prefer to Have $1 Million Cash Right Now or a Penny that Doubles Every Day for 30 Days?

Albert Einstein is credited with saying “compound interest is the eighth wonder of the world.”

To get back to the original question, would you prefer to have $1 million today or one cent that will double every day for 30 days?  If you chose the million dollars, you would leave millions on the table.

If you chose the penny and passed up the million dollars, on the second day your penny would be worth two cents, on day three it would be four cents, on the fourth day it would be 8 cents.  By day 18 the penny will have grown to $1,310.72.  By day 28 it will be worth over a million dollars:  $1,342,177.  On the 30th day it would be worth an astounding $5,368,709!

If the penny were to be allowed to double for another 30 days, the penny would grow to over $5 quadrillion (five thousand trillion!) dollars.

One of the things this illustrates is that compound growth takes time to make a dramatic difference.  For the person who wants to have enough money to retire in comfort, starting early is the key to success, even if the starting amount is small.

 

This Simple Tip Could Make a Big Difference in Your Retirement Account

You can make a 2016 contribution to your IRA or Roth IRA as early as January 1, 2016 and as late as April 15, 2017.  It would seem obvious that the sooner you contribute to your retirement account and invest the money, the more money you’ll have by the time you retire.
However, according to research from Vanguard, people are more than twice as likely to fund their IRAs at the last minute as opposed to the first opportunity!  When Vanguard looked back at the IRA contributions of its clients from 2007 to 2012, only 10% of the contributions were made at the optimum point in January, and over 20% were made at the very last month possible.
IRA Contribution Month
To demonstrate the type of real, monetary impact this can have on someone’s retirement savings, take the following hypothetical example.  On January 1 each year, “Early Bird” contributes $5,500, while “Last Minute” makes their $5,500 contribution on April 1 of the following year.  Assume that each investor does this for 30 years and earns 4% annually, after inflation.  Early Bird ends up with $15,500 more than Last Minute.  Put another way, Last Minute has incurred a $15,500 “procrastination penalty” by waiting to make his contribution until the last possible month.
Procrastination Penalty
At the beginning of every year, make fully funding your IRA contributions a habit. (And if you’re the type of person who works better when things are automated, look into setting up an automatic savings & investment plan from your paycheck or bank account to your IRA to save on a monthly or per-paycheck basis.)

Coins and Dollar Bills

The right time to invest?

time to invest

Is this the right time to invest?  Good question.

Here’s another good question:  when is the best time to plant a tree?
The answer:  “Now.”
Here’s a better answer:  “When you were a child.”

Time is our most precious resource.  A wasted moment is lost forever.  Trees take time to grow.  The same is true for wealth.

We are often asked “is this a good time to get into the market?”  The answer is that there is no better time.

Here’s why.

If you put your money in a savings account you might get about 1{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}.

At that interest rate it takes 70 years to turn $100 into $200.

If you could grow your money an average of 5{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} per year, that $100 would grow to $200 in 15 years.
If you can get 6{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}, it would take 12 years to grow to $200.
If you can get 7{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}, 11 years would get you to $200.
If you can get 8{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}, 10 years would get you to $200.

At 15{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} your money doubles every 5 years.

We are big advocates of people working hard for their money.  But we are just as insistent that money should work hard for them.  Why be a hard worker with lazy money?

Investing is one of those things that people put off.  But doing so wastes their most valuable resource:  time.

If you’re not happy with the way your money’s working for you, check out our website or give us a call.

No sales pitch, no pressure. Just good advice. That’s the reason we won the 2015 Suffolk Small Business of the Year award from the Hampton Roads Chamber of Commerce.

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