Were you aware there is magic in money? No, I am not talking about the times I made a quarter appear behind your ear. And no, I’m not talking about the times money magically appeared in my wallet to give you. Nope, the real magic is in something called compound interest.
There is something you need to realize before reading on. Compound interest requires patience and planning, two things most college students don’t have. Compound interest is like the elderly person driving 45 MPH in the slow lane on the freeway. They are going to get where they are going, but it’s going to go slowly and be a pretty dull ride.
Compound interest is interest on your money that compounds. Yeah, I know that didn’t make much sense. When you save money in an investment such as CDs or mutual funds, you are paid interest by the bank or finance company. They add this to your original money, principal. Here comes the magic. If you don’t touch that money, the principal and interest, over a period of 6 years, guess what happens? No, it doesn’t come alive, but doubles in value.
You can read the wikipedia entry on the magical rule of 72 for a technical even mathematical explanation. The beauty of this is that it requires no work on your part after you set the investment up. This is not true for stocks and other speculative investments, which are like legalized gambling. You need to have a contract with a bank or financial institution where they will pay you to use your money.
The biggest thing you need to learn is to always save some money. Don’t get yourself in a situation where every penny coming into your life is spent. Tuck some away in a simple savings account, CD or mutual fund. Promise yourself you will never touch that money unless it’s a dire emergency. And in terms of dire emergency, always check with us, other relatives or friends.
Six years may sound like a lifetime when you turn 18, but when you hit 30 it flashes by. Imagine socking away $5,000 one year when you are 22. By the time you’re 30 you would have $10,000. Here is a pretty simple chart showing how it works (the chart is from wikipedia):
Did I mention you need to always save money? Given the United State’s current financial situation, I am sure that entitlement programs won’t be around when you hit 40 or 50. Compound interest does two things: It doubles your money and it lets you dream. Think about it, if you sock away a little over $1,000 for 20 years you’ll be a millionaire.
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