MONEY OBEDIENCE

Save money or how Grace became a millionaire.

Two pieces of advice usually stand out, when you read good advice on personal finance. (1) Spend less than you earn and save money. (2) Pay off your debt. In this post I want to discuss why spending less than you are earning is so valuable. Why does it make sense to save?

When you save money today, the full benefit of saving doesn’t appear today. In fact, you do not see that much benefit in saving for some time to come. Worse yet, you even have to give up something in order to save – namely, you can’t buy stuff today with the money you are saving for some undetermined tomorrow.

Fortunately you get something in return for saving and not spending today. You receive interest on your savings. One of the most powerful and underestimated features of savings is this interest, and the fact that you are paid interest every year. And (after your first interest payment) you earn interest on both your initial savings and on the interest income that you saved. Getting interest on your interest is called “compound” interest. What a deal! To get a better idea of how the savings can add up with compound interest, let’s look at one example.

Just in case you missed it, read the story about the secretary who amassed a fortune of $7 million with a small investment of $180 and compound interest. This secretary, Grace Groner, is a real-life example of how you can make savings plans work for you. Let me repeat it again. Her $180 investment grew into 7 million dollars!

When savings can grow like that, you can see why it makes sense to put some money away on a regular basis. It is not just some theory or boring every-day advice. It makes a lot of sense when you run the numbers. And as Ms Grace Groner has proven, it actually works when you put it in practice, too.

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Posted in setting up a budget