In part one the example of a 14 year old who invests $5000 one time of the money earned while babysitting showed the power of compounding over a long period of time. Of course as effective as it to invest one time for a long period of time is the most effective way to make use of this is to do the same process multiple times .
Parcheesi with 72 Spaces
Previously I went over briefly the Rule of 72. After going the rule over with a few people in the last couple of weeks it seems the power of the tool is lost until it is applied in a personal finance context. The math behind the rule is simple. The number of 72 is divided by the interest rate of an investment equals the time in years the money will double.
Lately it seems to me there is a flood of people who I bump into who don’t realize the relation of their choices to the results of those choices. They ignore the basic concept for every action there is a reaction. You hit one domino and the rest fall as well.
I have a goal to have my money work for me rather than me working for money. The goal is a relatively simple math problem have your money create enough money to cover expenses.
The concept is simple but, getting the goal accomplished takes some preparation, perspiration, and inspiration . The reason I bring up my goal is it reflects back onto the decisions I make today.
One of the most basic financial choices I make everyday is whether or not I purchase something. Based upon that choice I am building up or taking away from momentum to or from my goal.
When I purchase something I always bounce through the following list in my mind:
- Is this something I need? or can I do without?
- Can the item purchase be delayed for a later time?
- Do I have the ability to buy cash (not via credit, incurring debt)
This list helps me keep my direction and focused when making purchases. I challenge the reader to make your own list based upon your own goals. This will help you guide your choices towards what you want to accomplish.
What are the dominoes that can fall if you buy a car without having the cash to buy it?
- You have to finance the car purchase price which also includes the tax and related fees–>
- The ability to be up-sold on more expensive features is easier–>
- The amount of hours you have to work is increased due to the increased cost–>
- The amount of free time is decreased due to having to work more to pay for the increased price
- The risk of having a car with payments–>
- Ability to sell the car is decreased; you don’t own the title
- If you lose your job the ability to make car payments has decreased–>
- The chances of a car getting repossessed is increased
- The opportunity to save future earnings has decreased–>
- The ability to invest in the future has decreased–>
- The cash needed to take part in future deals has decreased
This is just an example of one decision and you can see all the ripples that can happen. Everyone has made some decisions they could of made better if they just asked themselves what are the most likely outcomes of these decisions.
When you have the next decision to make ask yourself some things to help you get to the best outcome.
- Does this help me accomplish my long term goals?
- What are the risks? (How can I minimize those risks?)
Write down on paper what dominoes could fall if you make your decision one way then the alternative way. Find the path that makes the most sense.
Apply this to some of your financial challenges. See how you move closer to your goals rather then being a part a financial goal that someone else planned.
“Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.”
– Old English Proverb
Books are the fish of the information age…
I was watching a movie the other day on my VCR. The movie was” Nightmare on Elm Street” 1984 version. The tape was priced with a sale sticker of $15.99. I had bought the movie in the early 90s. I see the same VHS movie for about $5.00 on Ebay. In 20 years it decreased 2/3 in value. The DVD version was going for $6.00. BluRay was valued at $3.99 .
The cost of movies has gone down with better quality. The same for many consumer goods. Which begs me to think what can I wait to purchase and purchase for less? I still use a standard def – Tube TV 33″ while I know friends who payed top dollar for HDTVs when they first came out.