The world of finance and money can be a confusing place. Knowledge of the fundamental money concepts are the key to making decisions for you and your family.
Simple Vs Compound Interest
Enemies to wealth building (Inflation, Taxes, Risk)
There are three main enemies to your money and your family’s need to save and build up wealth. These enemies are universal and apply to everyone regardless of social and economic status. The enemies are Inflation, Taxes and Risks.
These three simple factors are the greatest ones that work against you and family’s future.
Inflation: Goods and Services cost more over time.
Taxes: In the US believe it or not over 50% of your hard earned income will be given up to taxes. You have to look at all the taxes that you pay and not just income tax.
Risk: All investments have some form of Risk involved in their growth model. The key is to reduced it. When it comes to retirement accounts most people don’t understand that in nearly all cases 100% of their accounts are at risk.
Rule of 72
Simple Interest is only earning interest on the initial principal put into an account. In any given year you will only earn a percentage, interest rate, of the original amount put in. Therefore, you will earn the exact same amount every year regardless to how long it has been in there.
Compound Interest is earning interest on the principal and the previously earned interest. Thus compounding on itself. With every subsequent year the amount you earn grows. The more you have in the account the more you will earn. The longer the money stays in the account the more you will earn. This is the basis of Time Value of Money.
Compound interest is the best way to grow money when it comes to the different types of interest: simple or compound. Banks typically will credit your savings accounts based on simple interest (slow growth). However, those very same banks will charge you compound interest (fast growth) on your credit card balances.
There are many financial growth vehicles out there that credit accounts based on simple interest. Make sure that you money is growing based on compound interest and not simple interest.
For example, the rule of 72 states that $1 invested at 10% would take 7.2 years ((72/10) = 7.2) to turn into $2. In reality, a 10% investment will take 7.3 years to double ((1.10^7.3 = 2).
The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself.
“The power to tax is the power to destroy.”
Time Value of Money
The time value of money (TVM) concept is the idea that MONEY available today is worth more in the future, over TIME. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is put into an account that can earn interest; presumably compound interest.
The classic example is of two people putting money away. One person grows the money from year 1, Person 1, and other waits until year 20 to begin, Person 2. Each puts in the same amount per month, $200. Both people earn the same exact compound interest rate of 8%. Person 1 makes the contribution from year 1 to year 10 and then stops. Person 2 starts at year 20 and continues for 40 years.
Who has more money?
Person 1 has $1.7 Million whereas Person 2 has $568,467. Even though Person 2 put in $64,800 more they are well short of what Person 1 has at the end of the same amount of time. The difference between the two is really when they started and the time that the investment had to grow.
Put away as soon as you can and grow for as long as you can.
Save, save, save!
Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recurring costs. In terms of personal finance, saving generally specifies low-risk preservation of money, as in a deposit account, versus investment, wherein risk is higher; in economics more broadly, it refers to any income not used for immediate consumption.
This is the main key to financial success. Saving money, as much as possible, will help ensure that you will be able to take care of you and your family in the future. The hopes of earning more when you need it will never make up for money saved up over time (TVM). You can never go back and save again once time has slipped away.
This money concept should not be confused with investment or finding ways to make your grow. Savings pure and simple is putting money aside. Savings has mistakenly been confused with investment, where risk is involved. The practice or habit of saving has slowly gone away and people relay more on credit than savings. We have become a debtor society instead of a savings society.
Role of Insurance
Importance of insurance or role of life insurance in our life has become a essential keystone in every family’s financial plan. The protection of YOU is critical to the family’s survival and their ability to grow and prosper. It’s not the most pleasant thing to think about, but planning now for your family’s future can help protect them and keep them financially secure when you’re not there to take care of them. Insurance is the most effective way of protecting your family and children. There are many other roles that Insurance plays that you may not be aware of.
Buy Sell Agreements
Tax Benefits for Individuals
Deferred Compensation for Business owners and employees
Business Planning and Partnership Agreements
Chronic and Terminal Illness
Gifting – Charity
Supplemental Retirement Income
Family Wealth Accumulation
Contact your OFS representative to learn more and to begin your family’s planning.