Friday, June 26, 2009

Save SMARTER, not Harder.

The Power of Compound interest?

Never underestimate the power of compound interest
because it is the rock on which your future wealth is built.
The sooner you begin, the more likely your plan will succeed.

Compounding occurs when the earnings on savings or investments are added back to the principal, or reinvested, which in turn generates additional earnings which are again invested, and so forth. This is such a basic process that it’s hard to see where the excitement is. And yet, compound interest can get the blood pumping when you realize the potential in smart investing.
Consider starting at the age of 21 by saving $2,000 per year each year. Though sound investment, you get a reasonable 8% interest on the principal. At age 30, you decide to stop and you leave your money growing at 8% until you retire at age 65.

Now assume you decided only to start saving at 30, but now you diligently save $2,000 every year until 65, again investing 8%.

Of course you reckon that having saved so much harder for so much longer, 35 years rather than just 10 years, you will have more than made up for lost time when you were young.

Well, the 10 year plan, in which you invested $20,000, will reap $428,378!
The 35 year plan, in which you have invested $70,000, will reap considerably less: $344,634.

Hence, the magic of compound interest.

Use compound interest to boost the value of your investment.
Work hard to improve the percentage return and stick with it.
Not letting compound interest reward you later years is such a waste of all the effort put in the first few years when nothing much seems to be happening. So, let's start investing now.

Related Articles on Save Smarter, Not Harder.

The "Kiss" Approach - "Keep It Simple & Straight forward"

The financial planning process consists of the following six steps:

1. Establishing and defining the client-planner relationship

The financial planner should clearly explain or document the services to be provided to you and define both his and your responsibilities. The planner should explain fully how he will be paid and by whom. You and the planner should agree on how long the professional relationship should last and on how decisions will be made.

2. Gathering client data, including goals
The financial planner should ask for information about your financial situation. You and the planner should mutually define your personal and financial goals, understand your time frame for results and discuss, if relevant, how you feel about risk. The financial planner should gather all the necessary documents before giving you the advice you need.

3. Analyzing and evaluating your financial status

The financial planner should analyze your information to assess your current situation and determine what you must do to meet your goals. Depending on what services you have asked for, this could include analyzing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies.

4. Developing and presenting financial planning recommendations and/or alternatives

The financial planner should offer financial planning recommendations that address your goals, based on the information you provide. The planner should go over the recommendations with you to help you understand them so that you can make informed decisions. The planner should also listen to your concerns and revise the recommendations as appropriate.

5. Implementing the financial planning recommendations

You and the planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as your "coach," coordinating the whole process with you and other professionals such as attorneys or stockbrokers.

6. Monitoring the financial planning recommendations

You and the planner should agree on who will monitor your progress towards your goals. If the planner is in charge of the process, she should report to you periodically to review your situation and adjust the recommendations, if needed, as your life changes.