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Colleen's Corner

Asset Allocation

Often financial "experts" make asset allocation difficult to understand. My goal in this series of articles is for you to understand asset allocation thoroughly, in an easy to understand format.
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What They Didn't Teach Ya About Money In High School Part 4

Dear Wise Consumer,

Slap on your letterman's jacket and grab a seat. Today I'd like to chat about something overlooked by most of us. It's a little thing, but it grows day by day. This thing can work for you or against you.

In part 1 of this short series, I talked about credit cards. Within that article I touched on interest rates. In high school it would've been great if they explained the amazing power of compound interest. Normally this works against us. All you have to do is look at your credit card statements. What does the interest rate say?

Let's say you have 3 credit cards. Credit card A has 12%, B has 16% and C has 7%. Before you pay a cent in principle 35% of your credit card bills goes to interest! If you don't pay the balance on time or early, they'll tack on more interest. It's no wonder America is swimming in credit card debt.

But you can get compound interest working in your favor. If you have an IRA, Roth IRA, 401K or other savings account, here's what compound interest can do for you.

Three Ways Compound Interest
Works for You

Interest Benefit #1: Increases Your Wealth

Slap $500 into a retirement account each year. I know this amount is small, but it's got teeth. Now let's say you're earning 9% per year on your money. The calculation for this is 500 x .9= 450. Here's what can happen.

Year 1: $950
Year 2: $1,805.00
Year 3: $1,624.45
Year 4: $3,086.55
Year 5: $5,864.45

I'm using conservative numbers here. But you can see how quickly compound interest can increase your wealth. Imagine what you could do with, by saving $1,000+ each year and getting 12% interest. Paying off those credit cards and getting interest in your favor, is pretty sweet, eh?

Interest Benefit #2: Puts Time on Your Side

Nobody likes the passing of time. We gripe about aging, money and everything associated with it. With compound interest time is your best friend. The longer you leave the money alone, the faster the time works for you. You'll have peace of mind knowing your retirement money is building.

Interest Benefit #3: Make Money in Your Sleep

Imagine waking up and turning on the laptop computer. You go online to check your retirement account. You realize that overnight compound interest put an extra $275 toward your retirement. There's nothing like making money in your sleep. But that's what happens with compound interest. You didn't do anything, but allow the money to be automatically transferred into your account. On some levels this can make you feel like a millionaire.

Get rid of credit card debt. Banks and credit card companies make billions on compound interest. And it's all off of you! Start putting that compound interest to work for you.

Go to www.mindyourfinances.com. Read the short article called, "The Power of Compound Interest." The interest table will tell you all you need to know.

Clyde McDade is a Financial Copywriter. He's the author of the upcoming E-book, "How to Grow More Money for Retirement and Your Child's College Fund." He can be reached at accelcs@comcast.net.

The information in this article is not to be taken as financial or investing advice. Always seek the services of a Financial Advisor, Accountant or Financial Planner.