Awake Finance

Called “The eighth wonder of the world” by Albert Einstein, compound interest is one of the greatest allies you’ll have in your financial journey – or one of your worst enemies.

In this article, you’ll learn about compound interest and the “Rule of 72”.

Put simply, let’s say you have $100 saved in your bank account, and somehow you’ve found a bank account that pays 7.2% interest (currently, 1.5% is the best out there FYI).  A year from now, you’ll have $1.07.20 in your account (100 * 1.072 for those of you playing along at home…).  That’s pretty cool!  You just got $7.20 for doing nothing!  But it gets better 🙂

The year after that, you’ll be getting 7.2% interest on $107.20, not your original $100.  Two years from now that makes your initial $100 worth $114.92.  That’s about $7 more again.  Nothing too exciting, but you’ll notice that year 2 produced ever so slightly more money than year 1.  $0.52 to be exact (107.20 * 2 = 114.40, not 114.92).  That $0.52 is interest that was paid on the $7.20 that was the first year’s interest.

Now, if we keep going like this for ten years, something exciting happens.  That $0.52 of “free” interest on the interest keeps growing.  By year 5 you’d have $141, by year 7 you’ve got $162 , and by year 10 your initial $100 has grown to just over $200.  You’ve doubled your money by doing nothing!

Not only have you doubled your money, but you’ve made 28% more money than you would have without the compounding.  Remember the first years interest?  It was $7.20.  Now, if we just look at ten years of that, it’s only $72 (7.20*10).  With compound interest, you’re worth $200 instead of $172.  That $28 only happens by getting interest on top of interest, on top of interest, on top of interest.  Compound interest is amazing when it works for you 🙂

That’s compound interest, and it’s also an introduction to “the rule of 72”.  Money doubles every 10 years at 7.2% interest.  Since it doubles every 10 years, at 20 years your $100 has turned into $400, at 30 it’s $800, and at 34+ years you have over $1000 for every $100 you started with.

That’s right.  If you start saving at 20, and work until you’re 70,  every $100 you save at 20 will be worth almost $3,234 by the time you retire.  If you wait until 30 though, your $100 will be worth half that.   That’s why it’s important to start saving as young as possible.

Now, this is a hypothetical bank account.  No bank or CD has paid 7.2% as long as I’ve been alive, so you choices are really stocks and other non-insured vehicles to get a high rate like this.  Fortunately, the S&P 500 has an average return of 9.7%, so even though there are ups and downs, you can easily stay on track with some smart investing.  For some homework, figure out what $100 could do over 10, 20, and 30 years at 9.7%.  You’ll be amazed at what just a couple percent can do when compounded 🙂

 

 

 

 

No, the title isn’t clickbait.  It’s 100% true.

Sure, it won’t be the only $100 in your account once you’re done, but every self made person started out saving $100.

Somehow, we all figured out a way to spend an average of $967.13 on Christmas last month, so we all know it’s possible to squeeze a little more out of our paychecks.  Let’s do it for ourselves rather than the big-box retailers.

Now, before you think I’m going to walk down the same old path of “stop drinking starbucks!” or some other tried-and-true nonsense, understand that becoming debt free is a marathon, not a sprint.  As such, it’s about doing the same things you do now, just smarter.  Sure, you can go whole hog and get ‘er dun, but if most of us could do that we already would have.  Here are some realistic, and proven, ideas that may help.

If you smoke, you’ve probably heard every non-smoker in the world tell you how it’s all smoking’s fault that you’re broke.  Whatever.  Yes, quitting is a vastly preferable option, but as an on again off again smoker, I know how hard it is to quit.  That doesn’t mean that you have to blow literally hundreds of dollars a month on a habit that’s killing you.  You can keep smoking, but use a Powermatic 2 Plus instead.  This is what I did when I smoked cigarettes.  I bought bulk tobacco and tubes, and could roll an entire pack of cigarettes for well under a buck.  Depending on cigarette prices in your area and how much you smoke, the machine can pay for itself within a paycheck and gets you well along the way to saving $100 in the very next paycheck.

I knew a girl once who saved hundreds of dollars a month by buying video games.  Yes, you read that right.  She bought video games to save money!  She had a problem of going out to the bar several nights a week and would spend $50+ dollars per night just on the “entertainment” at the bar.  In order to still have a way to unwind after work, she would buy a video game, and instead of spending $6+ per drink at the bar, she could go home after work and play video games.  Even though she still drank, it was at dramatically lower prices.  The games payed for themselves, and there were hundreds of dollars left on the table at the end of every month.

Sure, there are other more drastic ways to save $100.  You could cut your cable.  You could never go out to eat.  You could spend every waking moment collecting recyclables, clipping coupons, or radically changing your diet.  That’s not the point of this article.  The point here, on your very first goal of your financial future, is to not have to break two habits at once.

What both examples above allow you to do is to know yourself, and to work within your existing wants, needs, and habits.

Living paycheck to paycheck is a habit.  Debt is a habit.  The way we spend and save money is more by habit than by choice.  Cut yourself some slack 🙂  You’ll get there, but one step at a time.  Should we all quit smoking, stop drinking, and cut fast food out of our diet?  Sure, and each of those habits would save us an over $100/month on average in America (google it, it’s true!), but that’s not the point here.

If you try to save money by breaking another habit, you’ll just give up on getting financially free if you fall off the wagon.  Instead, let’s just modify the way we consume our favorite “bad” habits in a way that eases us into our financial future.

Once we have a plan to get to $100 in savings, the next question is “Why?”.  The answer is twofold.  First, many times our surprise expenses are under or around $100.  Brakes on the car.  The heat bill being higher than we expected.  A bill just slipping our mind and incurring overdraft fees.   A consistent $100 cushion could literally save you thousands of dollars of interest payments and other fees.  Secondly, with a little bit of self awareness and thought, literally everyone can save $100.  It’s important to make all your goals (especially your first one) very attainable.

The next question is “now what”?  Well, here’s your first tip.  Don’t spend it.

If you need to have a second bank account, fine.  If you need to take it to the bank and get a single nice, crisp $100 bill (which is harder psychologically to spend), do that too.  Take that $100 bill and freeze it in a cup of water so it’s harder to reach for in an emergency.

Whatever you do, don’t go backwards.  This is the start of something bigger than $100.  this is a radically life changing journey.  This money no longer exists unless it absolutely has to reappear.  If and when it ever does have to reappear it should be a solemn occasion.  The new iPhone, a fancy dinner out,  or next Christmas is not a solemn occasion 🙂

If you’ve already got $100 stashed away, congratulations!  What are some ways you’ve saved $100?

Stay awake my friends.

I have to confess something.  I hear voices sometimes.

No, my neighbor’s dog doesn’t tell me to kill people :-).  It’s that little voice inside my head that says “you can’t do that”.  “You don’t deserve that”.  “You know who you are, and people like you don’t….”.

Have you ever heard that voice?

This is the voice that both holds us back from opportunity, and also makes us go too far in the other direction.  When we go too far in the other direction, we squander opportunities by being overly confident and impatient, or we over spend existing resources to prove to ourselves, our families, and our friends, that we do “deserve nice things”.

We get our tax refunds and blow them in a week on things we’ll throw out before next year’s tax refund.

We get an opportunity at work, but we blow it because we don’t appreciate it as a step towards a goal rather than the goal itself.

We get a stretch of overtime, and raise our standard of living to meet our income to impress our friends, never realizing that overtime is not a raise and rarely permanent.

I know neither of us have ever done anything like that, but I’m sure we know somebody who has, right? 😉  Those people were acting in response to this tiny little voice, and those choices can have really big consequences.

I’m here to tell you, that voice is a liar.  You DO deserve nice things.  People like you CAN achieve success.  YOU CAN DO IT.  But you can’t do it tomorrow.  Probably not next week, month, or year either.  And that’s a good thing…

Lottery winners often are broke again within a few years.  They didn’t grow into millionaires, they were handed millions and brought their old broke thinking into their new rich reality.  If you want lasting success, you’ve got to grow into it.  And you can do that 🙂

Let’s start today.  It’s a little past new years, but it’s not to late to make a resolution for the new year that could change our entire lives.  Small choices add up (as do small choices to do nothing).  Let’s make some good choices together 🙂

 

Stay woke folks.

 

Hello friends!

Today begins a journey for me, and hopefully for you too.   I’ve spent most of my life thinking, reading, and talking about personal, spiritual, and financial growth.  Today begins a path towards sharing that knowledge rather than just consuming it.

As I sit here, cozy in my bed, I recognize the hubris and hypocrisy that you might be seeing right now.  I’m not rich.   I’m not even financially free (yet).  I get consumed by anger, jealousy, ego, and pride like everyone else.  Please forgive me, and forgive yourself for these things as well 🙂

The goal of this blog is to help us become more self aware together.   To understand how our emotions and baggage influence our decisions of what, when, and how much to buy.  To identify opportunity and self sabotage.  To prioritize the things that we value most in life, and then allow our finances to fall in line with our priorities rather than being dragged from one marketing slogan or social pressure to another thinking that they will make us happy.

Instead of spending our time to make money, and then spending that money (and then some) to be happy for a little while, we want to focus on fostering a sense of gratitude, appreciation of the “little things”, and a true love of self and the people around us.  By creating our “best self” and acting from a peaceful, balanced perspective we can view our current situation clearly.  Once we know where we are  we can see and seize opportunities to reduce expenses, increase income, become debt free and ultimately financially free.

I hope my world view will be interesting to you, and perhaps will even be helpful.  I look forward to at least providing you with some wholesome entertainment 🙂

Stay awake friends.