Posts Tagged ‘compound interest’

If you have ever flown on a commercial airplane, one of the airline attendants will go over the safety instructions prior to the flight. In the event that the oxygen masks should drop down, you are instructed to place your mask on yourself first prior to helping someone else with their mask. The reason is simple; you can’t help anyone else if you are passed out due to lack of oxygen. You must put your mask on first prior to helping someone else. The same is true in your financial life; you must pay yourself first.

Financially successful people make it a habit to take a portion of their income and save it before any other expenses. They take responsibility for their own financial future, not hoping the government or someone else will take care of their financial needs.

There is a mathematical reason why it is important to begin this habit as early as possible. It is called compound interest. The earlier you start the process, the higher the reward. An example many financial advisors use goes something like this:

Sally Earlybird begins investing $1,200 (only $100/month) a year at age 25, earning 10% a year on her investment. When she reaches 35 years of age, she stops contributing. Her friend, Fred Waittillater, decides he needs to begin investing and he starts at age 35, investing $1,200 a year earning 10%. He continues to do so until retirement at age 65. Who do you think has the most money at retirement, considering Sally only put in $12,000 and Fred put in $36,000? If you answered”Sally,” you understand the power of compound interest. Sally’s total amount would $367,090.06, while Fred’s would be $217,132.11.

The key is to start early and maintain the discipline of paying yourself first without touching that money. This is a process, not a get-rich-quick idea. Consistent and steady wins the race.

Jack delves into several other areas in the book that are worth reading through. I am going to add a couple of things here from my experience as a financial advisor (I am not currently a financial advisor, and I would suggest you find one who comes highly recommended from multiple sources).

First, remember that there is a difference between saving and investing. Oftentimes it is said that you are “saving” for retirement through your IRA or 401(k), when you are really “investing” your money in those vehicles. There are some options out there that provide less risk and decent rates of return without market volatility. Know what your risk tolerance is and where you are investing your money.

Robert Kiyosaki, coauthor of “Rich Dad, Poor Dad,” shares an important rule when it comes to your financial literacy.

Rule One. You must know the difference between an asset and a liability, and buy assets. If you want to be rich, this is all you need to know…Most people struggle financially because they do not know the difference between an asset and a liability.”

As you begin to pay yourself first, be sure you know the difference and start buying assets, things that will generate revenue. By developing the habit of taking a set percentage off the top of all your income, you will create a pool of money to buy income-generating assets. It starts with a consistent habit of paying yourself first.


(Our daily journey of the last 64 days of 2011 is centered on the principles found in Jack Canfield’s book, “The Success Principles: How to Get from Where You Are to Where You Want to Be.” In his book, he encourages his readers to begin teaching others these principles. I would highly recommend that you buy a copy of the book and join us on a journey to a better you.)