Compound Interest: When Less is More

Did you know that you can invest less money, but still end up with more money saved for retirement? Because interest is compounding, money you invest grows larger the longer it is invested.

Here’s a helpful chart to help you understand:

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This chart shows $100 growing at 8% annually over 30 years. Compound interest means that the 8% interest rate keeps growing off the interest you earned in all the years prior.  By year 10, your $100 is worth $200!  With simple interest however, you gain $8 per year every year.

Compound interest is the reason why you can invest less money earlier, and get huge gains in the long term.

Take the example of Chloe and Zack.  Chloe invests $2,000 each year from age 20 to 30.  Zack invests $5,000 each year from age 35 to 49.  Zack is investing more money, but Chloe has her money invested for a longer amount of time.  Here’s how their worth compares:

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Although Chloe invests $22,000 dollars total, while Zack invests $75,000, she still ends up with slightly more money.  That’s because Chloe’s investment had more time to benefit from the compounding interest. (Interest rate here is 8%.)  Had Zack invested 5,000 for a couple extra years, or started investing a few years earlier, he could have caught up with Chloe, but at a much higher cost.

Not everyone is capable of beginning to invest as early as 20, but everyone should be aware of the benefits of compounding interest.  Retirement is not about being rich, it’s about being money aware.

First Credit Card Mistakes To Avoid

Getting your first credit card can be a scary experience. Credit card debt can grow exponentially if you’re not careful and can affect your ability to buy a car, a house, or even get a job. Ideally, spending money you don’t own is never a good idea, but it’s not always practical.  Whether for building credit, or making end of month payments, here’s the most common credit card mistakes new credit card users make.

1.) Carrying a balance month to month.

I’m not sure what started this myth, but it is NOT TRUE. Carrying a small balance from one month to the next does not help increase your credit score.  For the best results, pay off each balance in full at the end of the month.

3.) Ignoring your credit utilization rate.

Even if you pay off every cent each month, you may still be hurting your credit score.  Credit companies also like to track that you are not using too much of your available credit.  Although this has less of an impact on your score compared to other things, lenders want to see that although you have credit available, you are not in a position to be using too much too often. If your credit utilization is above 30%, call your bank and ask for a raise in your available credit. This way, you can keep your spending the same and reduce your credit utilization. However, raising your available credit may result in a hard inquiry.

4.) Too many hard inquiries.

If you apply for a new credit card, increase your available credit, or apply for a loan, you will likely have a hard inquiry reported on your credit report.  A hard inquiry negatively affects your score because it shows that you are gaining too much credit too fast.  Don’t worry, because a hard inquiry is only reported for about 2 years.  Checking your credit score for non-lending purposes (like if you are using an app such as CreditKarma), is a soft inquiry and will not affect your credit score.

5.) Not tracking your credit.

In this day and age, there is absolutely no excuse for not knowing your credit score. Tracking your credit score is the best way for you to learn how changes in your spending affect your credit.  It is also important because the credit bureau might make a mistake in your credit that could go undetected until you need to take out an important loan.  You can dispute errors on your credit card, but only if you find them.

6.) Overvaluing the rewards.

Almost every credit card company offers rewards based on how much or where you decide to spend your money.  Any program that encourages you to spend money in order to make money should make you very nervous. Credit card companies offer rewards because they know it encourages most consumers to spend more money than they initially would.  A 3% cash back rewards may sound like a lot, but often times you will spend more than 3% in anticipation of rewards.

 

What’s been your biggest credit card mistake? What helps you stay on track of your credit?

Acorns: The Best Way to Invest in Your 20’s

I LOVE my Acorns account.  I am not being paid to say this (although… if anyone from Acorns is reading this…).  I am constantly trying to get my friends and kids in my classes to start using Acorns and begin investing with ease.

Two years ago, I was a senior in high school with a job at my local movie theater and lots of expendable income that was being funneled into clothes and junk food.  After a lesson on investing in my statistics class, I started looking for a simple way to invest.  Acorns was the only app I found with easy accessibility and was free while I was a student.

Features

Acorns is a great investing app for your 20’s because it is almost all mobile and focuses on small and consistent investments. You can set up recurring investments or round ups. Round-ups is a feature where Acorns tracks your spending and will “round up” each purchase to the nearest dollar and invest that amount once it reaches 5 dollars.  For example, If you spend $3.78 on coffee with your debit card, Acorns will track that and put .22 cents in your account from your bank account.  Although this might sound small, I’ve had over 400$ automatically invested from round ups in the past 2 years.  This is a great tool, because it forces you to invest more if you start spending more.

steve-johnson-628975-unsplash.jpgPhoto by Steve Johnson

Recently, Acorns unveiled Acorns Later which is a retirement account managed by Acorns. They help you decide whether you should start a Roth, Traditional, or SEP IRA. These accounts are great because they have low fees and offer tax advantages over a regular investment account.

One thing to watch out for…

If you are not a student, and are therefore not eligible for Acorns for free, then there is a flat $1 monthly fee if you have under $5,000.  This could be expensive depending on how much money you are investing.  For example, if you only invest $20 a month, then that is a 5% fee.  On average, you want to be making more using Acorns than you spend on it. If you can’t spare about $50 a month on average, then I would recommend looking into other sites with free introductory rates. For accounts over $5,000, there is only a .25% fee which is a great rate for ETF’s.

How to Stop Compulsively Checking Your Cryptocurrency Wallet

Owning cryptocurrency can be torture when you are constantly seeing fluctuations in your coin’s value.  If you find yourself constantly watching the value of your cryptocurrency, check out these 4 tips to help calm your paranoia.

1.) Remind yourself to think long term.

When cryptocurrency prices fall, it’s easy to immediately feel like you have lost money.  This could cause you to sell your coins as soon as the price drops below where you bought it.  When prices do fall, (and they most likely will) just remind yourself that cryptocurrency is incredibly volatile and will likely go back up in the coming days or months.  The money isn’t a lost until you sell it for a loss.

2) Think of your cryptocurrency as money already spent.

Although cryptocurrency prices have historically risen after every fall (not including the dip we are currently in obviously), that is based on a relatively short amount of time. Even Bitcoin, the oldest cryptocurrency, has only been around since 2009.  Big gains come with big risk, and cryptocurrencies are definitely a big risk.  Invest as much money as you are willing to lose.

3.) Keep cryptocurrency a specific (and small) portion of your portfolio.

The biggest problem when I began buying cryptocurrency was I never knew when to stop buying.  Since prices were falling, it always felt like a good time to buy.  Although this wasn’t a horrible mindset, it easily led me to investing twice as much as I intended.  Decide how much you want to invest, and what portion of that you want to be in cryptocurrency.  This could be a set amount of money that you convert to cryptocurrency and then hold, or small chunks every few paychecks. Remember, never keep all your eggs in one basket.  And, no, just investing in many types of cryptocurrency does not give you a diversified portfolio if that is all you are invested in. Don’t stop putting money in stocks just because you are also investing in Bitcoin.

4.) Invest smaller chunks over a wider period of time.

Even people who closely watch and analyze cryptocurrency prices often make mistakes or incorrect assumptions. Just like with stocks, it’s often a losing game to try and time the market.  Putting smaller amounts of cash in over a wider period of time will help lessen your fear of missing out if prices drop.

Be careful of putting too small of sums in too often however, because many wallet companies-such as Coinbase- have a flat fee for every cryptocurrency transaction.

What tips have helped you stop the endless cryptocurrency stress cycle?

How Inflation Affects Your Savings

What is Inflation?

The money you have today is most likely going to be worth less than that same amount of money tomorrow.  That is why saving for retirement is not just about squirreling money into a savings account, it’s about investing.

Have you recently gone into the grocery store to buy a can of soda and thought “Man, soda’s more expensive than I remember when I was a kid.”  If you have you have just noticed inflation.
The average rate of inflation is about 2% per year.  That means that 1 dollar this year will be worth .98 cents next year.  Similarly 100 dollar this year will be worth $81.71 in 10 years.  Here’s a chart for how the value of money decreases over time:

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As you can see, in 40 years the value of your money will almost half.  A savings account will generate some interest, but usually less than a percentage point.  In order to combat inflation, your money needs to grow more than 2% a year.

Why do we have inflation?

This is a highly debated topic for economists.  The current prevailing opinion is in support of inflation targeting.  Inflation targeting is the idea that economies do better under slight inflationary circumstances.  The argument states that inflation causes people to see increases in their salary (although they might not notice the raising costs) and also stimulates the economy by encouraging people to use their money instead of letting it sit in a bank account where it will lose value.

The Federal Reserve has a target rate of inflation of about 2% annually.  This is considered small enough to decrease volatility in the economy that come from high inflation and large enough to effect decision making in the general public.

How Do I Prevent Inflation From Affecting My Retirement?

In  order to stop inflation from chipping away at your retirement savings, you need to make sure your retirement money is earning interest at a rate greater than 2% a year.  Investing in the stock market is the most common way people grow their money; although, you do have to be careful with how you invest it.

Exchange Traded Fund (ETF)

Exchange Traded Funds are pools of investments that match the stock market.  ETF’s are not managed daily meaning you don’t have to pay the same fees as you would for a mutual fund.  ETF’s are a great tool for long term investment, because the low fees mean a smaller marginal cost which over time can save you loads of money.  For beating inflation, ETF’s historically average 10% returns per year, although that is a long term percentage.

Mutual Funds

Mutual Funds are very similar to ETF’s in that buying a mutual fund gives you access to many stocks at once.  Mutual funds, however, are usually run by hedge funds that try to beat the market.  Because they are providing a service by trying to get greater returns than the market, there is a larger fee for a mutual fund than an ETF.  Mutual Funds can also be a great addition to a portfolio.  Mutual funds also make about 10% a year.

Individual Stocks

Buying individual stocks CAN give you amazing returns on your investment, or you could lose it all.  Although this all or nothing mentality can seem attractive to some, it’s not a guaranteed way to stay above inflation.  If you really support a company and it’s product then go ahead and invest a small portion of your portfolio, but I wouldn’t bank on every stock beating inflation in the long or short run.

Why I’m starting my IRA at 20.

 

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About 3 weeks ago I started my first retirement account.  To many in their 20’s, starting a retirement account seems senseless because they have little expendable income, loans, and are a long way off from retirement.  But money you put away today will go a long way in the future.  When you calculate the good money habits you’ll develop and compounding interest, starting early is the key to retirement.