Compound Interest: The Stuff Of Savings Dreams

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How Do People Build Wealth?

There is really only a few options.

  1. Inherit money! Why are you reading this website? Get back to maxin’, relaxin’, and livin’ large! You belong on East Egg and probably had your father give you a small loan of a million dollars to start out. Dope, dude!
  2. Zuckerberg somebody! Get out there and steal someone else’s idea and profit on that sh*t. No mercy.
  3. Come up with a billion dollar idea! Get your Elon Musk on. This is probably the fastest way to make a huge amount of money. You already knew this.
  4. Become a really smart investor. This also takes time. Warren Buffett didn’t just wake up one day to find he had billions in the bank. He makes smart picks, no doubt. But don’t think he’s always beating the market. The only person who can do that is someone with insider trading knowledge.
  5. Invest Money & Let It Grow. This is how most of us do it.

Sorry to bum you out if you were hoping I had an answer to making you wealthy through the first 4 options. If I did, I’d tell ya.

The truth is that most people build wealthy slowly and overtime. That’s how people save for retirement. They invest money as they go and eventually have a sizeable nest egg to retire on.

UNLESS, of course, you don’t invest enough or do so at a young age. Plenty of people can catch up if they work at it. But honestly, no matter how much you think you could catch up later on, there is NO advantage to building wealth better than TIME. The more you have of it, the more wealthy you’ll be based on how much you put in.

Now, you’ve most likely heard this before. That saving money while you’re young is really important. But hey, it’s tough to save money when you’re young. You don’t have as much of it right now. But it’s okay, even a little bit will make a huge difference.

What Is Compound Interest?

Investopedia defines it as, “Compound interest is interest calculated on the initial principle and also on the accumulated interest of previous periods of a deposit or loan.”

Okay, so what does that really mean? It means that when you invest money in the stock market, a mutual fund, a bond, a savings account, whatever…you’ll be paid in interest for investing your money. Stocks go up, you’re making money. Duh, you know this.

BUT, here is what it really means for you. Let’s say you invest $100 in your savings account. The bank pays you 5% interest. (We can only dream, but it works for this example)

After 1 year, you now have $105. ($100 you invested plus the $5 they paid you in interest for the year)

Now is when you start making MONEY ON YOUR MONEY. This is the sh*t if you’re into finance.

After 2 years, you now have $110.25. Wait, shouldn’t I have only $110 if they pay me $5 every year? NOPE. They paid you interest money on the $5 you earned last year too. So lets calculate that. $105 * 5% is $5.25. Add that together to get $110.25. You made 25 cents on the interest money they paid you from year one. Interest on your interest! Get it?

How Huge A Deal This Is

Here is an example of someone saving money and investing in the stock market that assumes a 7% return. (From BusinessInsider)

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Damn, Chris. You’re a millionaire now. You’re all all-star. Get your game on, go play.

So what happened here? Chris invested way earlier than the other two as you can see. This is what I was talking about in regards to time being on your side while you’re young. Compound interest doesn’t make a huge difference until around 40-50 years old for him compared to the others. But after 50, he skyrockets away from those other shmucks. This is because compound interest begins to snowball as you get older.

The Rule Of 72

There is a rule that says to find the number of years required to double your money at a given interest rate, you just divide the interest rate into 72. Let’s try it with Chris’s presumed 7% return. 72/7 =10.29. This means that every 10.29 years, he doubles the total amount of money in his account.

So if he is starting 10 years before anyone else…he doubles his money 1 more time than anyone else. This is where the ending of retirement gives you HUGE gains. Just by starting 10 years earlier, he has the chance to double his money once more before retirement. That is why he has roughly double what Bill has. Chris roughly got to Bill’s number 10 years before he did. Therefore, he doubled his money once more by the time they retired. Instead of 500k, he has over a million. One more time…Damn, Chris. Back at it again with that compound interest.

Do you see how big of a difference it can make to start early? Even small contributions earlier on makes the difference in how much you’ll have later on. And this assumed Chris ONLY had a 7% return. The AVERAGE return of the stock market from 1928 to 2014 was 10%.

How big of a difference would 10% make for Chris? He would have $2.8 Million.

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What if he bumped up his savings to 10k a year instead of just 5k? $5.6 Million

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Imagine The Possibilities!

This is how compound interest works and how people really build wealth. They invest wisely and save as much as they can. And they do it earlier than later.

THE PROBLEM

People in the United States don’t realize this. They push this off until later in life when they think they’ll be making more money and have more to save for retirement. But later in life you’ll probably have a significant other…then a spouse…then some kids. There is always an excuse for not saving. Which is why older generations getting ready to retire are in CRISIS.

Here are some stats to scare you. (Found here.)

  • 45% of Americans have saved nothing for retirement, including 40% of Baby Boomers.
  • 38% don’t actively save for retirement at all.
  • 20% of Americans tap into their 401(k) assets early, either through a loan or withdrawal.
  • 80% of Americans between the ages of 30 and 54 believe they will not have enough saved for retirement.
  • 36% of American adults over 65 are completely dependent on Social Security.
  • 63% are dependent (but not necessarily completely reliant) on Social Security, relatives, friends, or charity at age 65.
  • Social Security is running out of money, and will only be able to cover 77% of promised benefits beginning in 2034.

All those dreams of traveling the world in retirement? Consider them gone if you don’t seriously start thinking about this. There will be millions of American’s who will be just scraping by in their old age. It’s sad and it shouldn’t be that way.

But the reality is no one cares more about you than you. So do yourself a favor and begin saving as young as possible.

The Great News

You’re super smart. Yep. You are. You obviously care about this enough to read this site or have done some digging on your own. You can set yourself up and benefit from the knowledge others don’t have. Start thinking about saving!

In a future article, I’ll tell you where to do it and how to do it.

Thanks for reading! Subscribe to my email list! I’m basing how often I write on the subscribers I get. If you enjoy my content, please help me out and let me know you do. Just joining my email list is all I need to know you’re enjoy the posts!

Until next time!

Matt Dalton

YoungMoney101 Posting Schedule

Hello!

Thanks for being a reader of YoungMoney101. I really appreciate your interest in the site. Along with today’s post, I’ve decided to write an update on the happening of this site. The biggest question I’ve gotten so far is in regards to how often I’ll be writing.

As of now, I plan to be posting a new article 2 times a week.

Although YoungMoney101 is only 2 weeks old, it’s getting lots of attention! More than I originally anticipated. This makes me excited to write more and do more for you, the reader. I feel 2 postings a week in manageable for me to do, as well as the right amount of content for my regular readers. The intended audience for YoungMoney101 is young people looking for explanations, tips, and tricks for how money works and how manage it better. Although finance nerds like me love updates on these kinds of things everyday, I recognize many do not. For now, I’ll stick to 2 posts a week and manage the demand for content as time goes on.

Guest Posts Coming Soon!

In other news, I plan for this site to occasionally feature guest writers. I’m fortunate to know quite a few brilliant young people who have perspectives on money, the job market, or something else that I think you guys would really enjoy. Any articles written by guests will be found in a new guest posts section of the site I’ll be creating. All guest writers will have to stick to a standard of citing any sources they pull information from so you know you’re getting just the facts.

Other YoungMoney101 Info:

This site will continue to be a work in progress. My background isn’t in web design or search engine optimization. But I’ll be figuring it out as we go! I recently figured out how to get my site indexed. You can now find me on Bing and Yahoo! as the first search result when typing in “YoungMoney101” or “Young Money 101” to the search bar. Google is a work in progress. You can find me there, but probably further down the first page. Help me get further up by searching my site!

As always, thank you again for reading! Comment below any questions you have about YoungMoney1o1.

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What’s The Deal With CD’s?

Certificates Of Depositcds

(You didn’t think I meant compact disks, right?)

I’m not sure what’s happened, but everyone seems to want to know about CD’s these days. I’ve had at least 6 people ask me about this in the last couple months. In fact, my best friend’s fiancée asked about them last week.

Are your banks trying to pitch you on buying these or something? Just curious. With a strange amount of interest on these and because they’re easy to explain, I’m going to write about them.

So What Is A Certificate Of Deposit?

It’s an investment product offered by banks that offer a specified rate of return over a set period of time. The period of time varies depending on the bank, but common time frames are 6-Month, 1-Year, 2-Years, 3-Years, and 5-Years.

They are super easy to understand.

The deal is that you deposit a preset amount of money with your bank and agree to let them hold onto it for a period of time that you choose. In return for letting them hold your money, they will pay you interest on the money you deposited. At the end of the time period you get your principal (money you deposited) back.

If you’re wondering how this benefits them, it gives them cash reserves. Banks have a complex system of managing all the money that comes in and out. Basically, while your money is being “held” in the CD, they’re lending out your money to other customers or simply holding it because federal law mandates banks to keep a certain amount of money in reserves. But don’t worry, you’ll get your money back. CD’s are FDIC insured and are one of the safest investments you can make. You might as well go buy some T-Bills.

So They’re Safe To Invest In? Sweet, Dude! Sign Me Up.

Yes, they’re basically risk free investments that will make you money.

BUT: How much money you make largely depends on 2 things.

  1. How much you deposit
  2. How long you’re willing to deposit it for (this is the key to CD’s)

The more money you deposit and the longer you’re willing to let them hold onto it, the better interest they will pay you. I’m tempted to explain why time value of money (TVM in the finance world) makes this the case. But, for now, just know you’ll make more money for letting  them hold onto it longer.

So How Much Can I Make?

Ah, finally, what you really wanted to know. The best answer to this is you’d need to figure out how much money you’re willing to invest in one and how long you’d be OK with not having access to that money. This is because if you withdrawal from the CD before it matures, there’s a pretty big penalty. You don’t wanna do that.

You can check your own banks rates on CD’s, but here is a list of the BEST rates I could find. (As of 9/15/2016)

6 Months – Capital One 360 (0.9%) No min deposit

1 Year – Barclays (1.20%) No min deposit

2 Years – First Internet Bank (1.36%) $1,000 min deposit

3 Years – Barclays (1.50%) No min deposit

5 Years – First Internet Bank (1.92%) $1,000 min deposit

I found all these using NerdWallet.com. These also assumed my zip code and a minimum balance of $1,000. You can go play around with their tool to see if you can find higher ones that I did. You probably can, I didn’t dig that hard. I just wanted to give you an example of the going rate for them these days.

So the first thing you’ll notice is that to get higher rates, sometimes there is a minimum amount you need to deposit and that the longer you keep it in there, the more you make. Unless you find a CD like the ones Barclays seems to be offering right now that don’t require a minimum. This happens sometimes because banks just need to raise their capital reserves.

Great! I’ll Go Buy Some!

Well not so fast. Here comes the catch.

You knew there had to be one, right?

CD rates are at historical lows. Check out this graph from Bankrate.com.

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Sorry to disappoint but the rates on CD’s have literally never been lower. You’ll notice a serious drop off somewhere between 2005 and 2010. I’ll let you figure out what happened there.

Anyways, this doesn’t necessarily mean you shouldn’t buy any. Just that they are not what they used to be.

Warning, Unqualified Opinion Ahead!

The reason I’m confused why people are so interested in these is because there are just so many better options out there to make money. Especially for college students who 1) don’t have tons of cash to invest and won’t earn a ton of interest money 2) don’t know where they’ll be 6 months, 1 year, 5 years from now as a CD requires.

Things are going to change for you a lot in the next few years. I’m going to tell you the same thing I told my best friends fiancée:

“What happens when you need that money for something next year?”

Now, this is something I’d really only say in a select set of situations. Investing money is very wise to do at a young age because of the immense benefits of compound interest. It’s the only way you could possibly ever retire! But investing in CD’s in my opinion is just not worth the draw backs of the time factor as well as the minimal amount you receive for all that commitment.

The stock market will give you way better returns than a CD as I’m sure you know.

BUT, that’s actually not what I recommend you do unless:

  1. Have a solid emergency savings account first
  2. Pay off all bad debt (there is a difference between good and bad)
  3. Get a retirement account set up and begin contributing (This is investing, but not in the same sense as a non-retirement investment account that invests in stocks, funds, ETF’s…etc.)

I probably just opened a can of worms. I swear this website will explain all that stuff.

But here’s my deal.

If you’re looking to make a bit of money on your savings (or at least better than your banks measly .01%)…

Check out an online savings.

Online banks can pay beyond 100x better than your brick and mortar bank. They can also pay better than lots of Money Markets!

This is because they don’t have the costs of running an actual retail location you can walk into. It’s all online. Less costs means they can pass the savings onto you in the form of higher interest rates on your savings.

The case for an online bank:

  1. Higher interest rates
  2. Higher than almost any CD under 1 year
  3. Take out your money anytime! No need to commit! (which I know you love)
  4. Often times, better user interface than your regular banks website
  5. Better customer service
  6. Move your money between your bank and online savings account very easily
  7. No monthly fees

OK, So How High?

Up to 1.05%! (Synchrony High Yield Savings)

Ok, so that’s not a ton of money. But hey, it is WAY better than your banks .01% by a huge margin.

You might be able to find a bank with 1.10%. Offers like that happen every so often.

Who Do I Use?

Ally Bank.

They pay 1.00% on all balance tiers. No minimum. I also really like their user interface and think they’ve got good customer service from my own experience with them. I just opened with them 6 months ago. So far, so good! They deposit my earnings at the end of each month. Now again, it’s not a ton. But it’s better than nothing.

I’ll do a full review of Ally soon, but just figured you’d might wanna know who I use. Not being paid by them to say this!

I’ve hoped you’ve learned something and feel better educated on CD’s pros and cons!

Please comment below! I want to hear from you guys. (Yes, you can comment anonymously if you like. Just don’t enter your info and press submit)

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Please share and help my website grow! I would really appreciate it. It takes time to write these as you can imagine.

Until next time!

Matt Dalton

Credit: What The Heck Is It?

3 Most Common Question I Get About Money:

  1. How do I start saving more money? And where do I save it?
  2. Should I invest in the stock market?
  3. I don’t know what my credit is like. How do I find out?

Today, I’m going to answer the third question. Now, most commonly when someone asks me this, they’re asking how their credit is effected based on how they use their credit cards. But your credit is decided by far more than that.

I’m going to explain how your credit gets decided and where you can check it.

Your parents or someone in your life has most likely told you that building good credit is critical.

And it is.

SO WHAT IS CREDIT?

Your credit is defined by a variety of factors. These factors are weighed differently so that some matter more than others. Based on the calculation of the various factors, credit reporting agencies give you a credit score. Different ratings agencies decide on their rating scales differently. But the most common scale is rated between 300-850. This is known as the FICO score.

In the Untied States, there are 3 big credit reporting agencies. ALL of them have your information. Even if you don’t have a credit card.

These 3 are…

reports

 (1) Equifax

 (2) Experian

 (3) TransUnion

 

WHAT DETERMINES MY SCORE?

  1. Credit Card Utilization (High Impact)
    • The amount of your total available credit that you’re using on your credit cards.
      • For example, lets say my credit limit is $1,000. I spend $100 this month. My utilization is 10%. Easy, right?
  2. Payment History (High Impact)
    • Hey, are you paying your bills on time? (This can include credit cards, auto loans, student loans, your rent, utilities)
  3. Derogatory Marks (High Impact)
    • The number of collection accounts, bankruptcies, foreclosures, civil judgments or tax liens on your report
      • Hopefully you have none!
  4. Age Of History (Medium Impact)
    • How long have you had credit accounts for?
  5. Total Accounts (Low Impact)
    • How many credit cards or loans do you have right now?
  6. Credit Inquires (Low Impact)
    • How many lenders, possible landlords, employers have asked about your credit?
      • There is a difference in credit inquires called Hard Pulls and Soft Pulls.

Learn more about these factors HERE.

There ya go! You now know how your credit is determined.

WHAT IS A GOOD SCORE?

Credit Score Range Definitions (Sourced from Experian.com)

  • 800 +: Indicates an exceptional FICO Score and is well above the average credit score. Consumers in this range may experience an easy approval process when applying for new credit. Approximately 1% of consumers with a credit score of 800+ are likely to become seriously delinquent in the future.
  • 740 to 799: Indicates a very good FICO Score and is above the average credit score. Consumers in this range may qualify for better interest rates from lenders. Approximately 2% of consumers with a credit score between 740 to 799 are likely to become seriously delinquent in the future.
  • 670 to 739: Indicates a good FICO Score and is in the median credit score range. Consumers in this range are considered an “acceptable” borrower. Approximately 8% of consumers with a credit score between 670 to 739 are likely to become seriously delinquent in the future.
  • 580 to 669: Indicates a fair FICO Score and is below the average credit score. Consumers in this range are considered subprime borrowers and getting credit may be difficult with interest rates that are likely to be much higher. Approximately 28% of consumers with a credit score between 580 to 669 are likely to become seriously delinquent in the future.
  • 579 and lower: Indicates a poor FICO Score and is considered to be poor credit. Consumers may be rejected for credit. Credit card applicants in this range may require a fee or a deposit. Utilities may also require a deposit. A credit score this low could be a result from bankruptcy or other major credit problems. Approximately 61% of consumers with a credit score under 579 are likely to become seriously delinquent in the future.

OK, SO WHY DO I NEED A GOOD SCORE?

This is why:

  • Having good credit shows your ability to pay back debts
    • Whether that be on a credit card, student loan, auto loan, mortgage, etc.
  • Building credit is also evaluated by your potential landlords or employers (to evaluate your ability to repay something)
    • Apartment companies or landlords will more often that not pull your credit when evaluating your potential as a renter
    • Employers frequently check your credit during their background checks on you
      • Companies say they primarily do this to prevent or reduce theft (More Info On that Here)
  • Building good credit will qualify you for lower interest rates over the course of your life saving you TONS of money.

Matt, I don’t have any credit cards, student loans, auto loans, rent payments, or utilities payments in my name. This is useless information to me, dude!

It’s not! Here is why you should still check your credit.

Fake accounts get created all the time. It’s called identity theft. Someone out there can easily be using your name to open accounts. Heck, your own bank could be opening accounts without telling you! If you haven’t heard, Wells Fargo opened millions of UNAUTHORIZED customer accounts without people knowing. They’ve been convicted and owe $185 Million in fines. That happened last week. (Sept 2016) Learn more about that HERE. I personally bank with Wells Fargo. I’m not leaving them. I’ll write a future post on it.

Don’t let someone mess up your credit without you knowing. Check it.

Also- If you’re an authorized user on one of your parents credit cards (even if it’s not in your name), it’s still on your credit report.

FINE, WHERE DO I CHECK IT?

Federally mandated law requires you have access to 3 free credit reports a year. One from all the big 3 companies I mentioned above.

CREDIT REPORTS HERE: https://www.annualcreditreport.com/index.action

You can report fraud, misinformation, and get a good idea of what’s out there for you. This website is 100% safe. I recommend checking one of them every 3-4 months so you have year round coverage of your credit report for free.

BUT WHERE IS MY SCORE?

Your credit report doesn’t give you a score. In the past you had to buy it from one of those 3. But this is 2016, my finance curious friends.

Many banks are beginning to offer the score for free on their websites when you log in. Not all do, but see if your bank does!

WHERE I GET MY SCORE: CREDIT KARMA  —   https://www.creditkarma.com/

You’ve seen a commercial for these guys. Have you thought it was a gimmick? It’s not. I promise you. I’ve been using them for years. They will give you your score AND your credit report from 2 of the 3 FOR FREE. Anytime you want, as much as you want.

(It doesn’t effect your credit because it is a soft pull)

It’s super user-friendly and I’ll go into detail about why I love CreditKarma so much in a future review. CreditKarma is not paying me to say this. I truly love their site.

You can see your credit score each month super easily. (Mine got a nice boost this month as you can see)

my-scofre

Even break out possible scenarios!

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Super handy!

SO NOW GO CHECK YOURS!

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Comment down below your own thoughts and experiences! Share with your friends. The more views on the site, the more posts I’ll be writing.

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Thanks for reading!

-Matt