Monday, April 18, 2011

Investing, it makes sense!

Here a couple of weeks ago my fiancĂ©e and I went to the Dave Ramsey Total Money Makeover conference. It was a huge wake up call for us. Not that we live extravagantly, or (always) spend unwisely; but there is much more to finances, and a lifestyle of debt than either of us had thought about.

In the past 7 or so years I've become a big proponent of investing. In simple terms, it is making your money work for you. And even if you're not a math wiz you can understand the power of "compound interest" (interest that is reinvested).

Without getting into the "to have credit or not to have credit" debate; let's say that instead of buying that brand new slick car with a monthly payment of $400, you opt for a different but nice and reliable car that has a payment of $250 a month. If you were 20 years old when you took on this new car payment, and invested that $150 difference in a mutual fund with a modest return of 8%, for the life of the car loan (say 60 months). If you didn't touch your investment, and never even invested in it again after those 60 months, at age 65 your $9,000 investment will have become $269,314 !!!

Here is an example that Dave Ramsey gave regarding the power of compound interest:
Ben starts investing $2,000 per year at age 19 and stops at age 26. Arthur starts investing $2,000 per year at age 27 and keeps investing that until he turns 65. Both receive a return on their investment of 12%.

Ben only put in $16,000 but started early. Arthur puts in $78,000 over the course of his life. You'd think that Arthur would have more money right?! Nope. The magic of compound interest benefits those who start early, and have patience.

When Ben turns 65 his investment is worth $2,288,996!
When Arthur turns 65 his investment is worth $1,532,166.
Seeing numbers like this make me think about my spending habits, and even my "investment" in buying a house. They say that real estate is a great investment, and even though I have a 5% interest mortgage, about 90% of my monthly payment doesn't even go towards the principle. I'm losing thousands of dollars a year to interest. I bought my house when the housing market was hot, and sure it's expected to come back around. I got a house that was more than I needed and in a costlier area to live in because I expected to sell it right away and make some quick money. My next door neighbor, who has a similar house is selling his for $50,000 less than I paid for mine.

What if I had been wiser? What if I had purchased a used home, or a more affordable one, and then started putting money away in my investments? What about thinking in smaller terms, How can I cut corners, or get by on less so I can invest?

It's your money! Make it work for you! Stop giving it away!

Dave Ramsey's Investment Calculator

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