Tuesday, January 15, 2008

Save 10%, Grow Wealthy

It is frequently said that if you save 10% of your income then you will grow wealthy. It need not be 10%, of course, but can be 11% or even 12%, but there is something about 10% that appeals to people. It is not only a nice round number, but is also easily worked out. 10% of $520 is $52 …#34; you know it immediately. 10% is a tenth.

10% is also a tithe, which it is said by some to be what you should pay to your church, and the figure is also frequently used as an example in savings. If you put away 10% of your income every week, month or year then you will get rich. It is said often, and it is true. The nice round figure of 10% will make you rich well before you reach retirement age. You can work it out for yourself, using any compound interest rate you like. However, it is better if you choose a vehicle for your savings that will earn you a decent return rather than just stick it in a bank.

Obviously, nobody wants their life savings to be invested in anything risky, but there are plenty of secure investment possibilities available for you other than just using a bank at the relatively poor rates that they offer. Mutual funds are fairly conservative and safe, and are generally a better option than individual stocks. Sure, you can be lucky and make a lot of money from individual shares but you can also lose the lot in a very short period of time.

You might want to include an element of risk in your portfolio, with the possibility of a quick high return, but generally you are more secure with something safer. You will also sleep better knowing that all of your money is not liable to have disappeared by the time you waken up in the morning. Many people prefer just to put it away in a safe account every month, and let it accumulate with the compound interest it earns. Compound interest can be a very powerful money-building tool over a period of years.

If you earn $3000 monthly, and put away $300 a month for 30 years at 5% interest, you will have $252,058 at the end of it. If you can’t wait that long, you will have $124,637 after only 20 years. Keep in mind though, that this is not a get rich quick scheme - there is no such thing that is not very risky. The save 10% to grow wealthy scheme is a long term thing. You start in your twenties and reap the benefits in your fifties.

It might seem a long time away now, but it will be here quick enough, believe me! Naturally, you will have more than that, since your 10% will be increasing every year in accordance with inflation, so these figures are real figures, based upon current cash values. Hence, the $252,000 will be worth just that, and not be reduced due to inflation, unless you keep your saving at only $300 rather than 10%.

Many people pay themselves first when they get their weekly or monthly pay-check. A direct transfer from your bank to your investment or savings account looks after the mechanics of it, and the rest is yours for your bills and other normal expenses. Whatever you do, do not touch your savings. Put it into an account that needs a three months or longer term notice of withdrawal.

You could even split your 10% saving into two parts. 8%, say, for your solid savings account and 2% into an investment account for these risky investments. Wait until you have a reasonable amount saved up and then use part of it to buy stock that could give you a fast return. The income from that can either be transferred to your savings account or put back into your 2% account. However, if you put it into your savings account you will not be able to lose all your earnings. You will only ever lose 2% a month, and much if not all would be offset by the profits from your risky investments that goes back into your longer term funds.

However you do it, it is up to you. The fact is, that if you save 10% every month, you will grow wealthy. It is fact, not theory!

1 comment:

Reese said...

Good, sound advice. Especially in a world where the savings is shrinking and the debt is growing (per average household in America).