Tuesday, March 14, 2017

It Takes Money to Make Money

Everyone understands that it takes money to make money. The problem is that most do not have the money for basic survival let alone investing it to make more money. If I have a limited income and it all has to go to basic needs and then struggles to cover the bills, there is nothing that I can invest. In decades past it was profitable to put money into the bank and one could "pull" a paycheck off of the interest that the savings account made. It might not have been much but that was how people planned their retirements.

For example, If I had $100.00 in the bank and the interest rate was 8% v.s. the .25% that we have today that was a significant amount of interest. This is can be seen in these calculations.

$100.00 * .25% = $0.25
$100.00 * 8.00% = $8.00

That is a significant difference. This is what was happening a few decades back. People would put their money into the savings account it was worth something.Their money was working for them. So, just to depress everyone some more let's look at the differences at $1,000.00, $10,000.00, and $100,000.00. using the above interest rates.

$1,000.00 * .25% = $2.50
$1,000.00 * 8.00% = $80.00

$10,000.00 * .25% = $25.00
$10,000.00 * 8.00% = $800.00

$100,000.00 * .25% = $250.00
$100,000.00 * 8.00% = $8000.00

So, that seams to be more than a little depressing. Is there a way to make that much interest in today's world? The answer is yes but it is very difficult. Unfortunately, we will not be exploring this issue today. What I want to do is work with the money and the rates that you have accessible today. That means start putting money in the bank so that you have some security if you loose your source of income. We must strive to set aside a few paychecks worth of cash in order to be secure if there is a change in our employment. So this might see like nothing much but it is a start. 

A lot of the jobs out there are giving a paycheck every two weeks some are weekly and a few are monthly. What I want to focus on is the paycheck that is received every two weeks. I also want to remind you that this is not a super fast process but it many times is the only option and the least risky option. It does not make a difference if you make  $100, $500, $1000 or more per paycheck, the principle is exactly the same.

If you are paid every two weeks that means that you get 26 paychecks a year. For this example I will be using the idea that you are making $1000.00 a paycheck. Any you can save into the bank any amount of money that you can make do with out. In this example I will be assuming that you can save just $20.00 a paycheck. 

The first thing that you want to do is take the first deposit and open a savings account in a bank. It would be best if it was a account that you could have $20.00 deposited directly from your paycheck. Some employers allow you to break your paycheck into more than one deposit account. If your employer does this great if not make sure that you deposit this money and don't touch it. This is your lifesaving account. This is only to be touched if you loose your source of income. It would also help if this account was not easily accessible to you. I have had bank accounts in other communities or other states that were difficult to access so that I could not dip into that savings. 

Now let us look at how much you can save in just that one year period of time. Remember we have 26 paychecks of $1000 and we are going to save $20.00 out of each paycheck. Here it goes;

          Amount of Deposit             Amount Saved
  1. 20.00                                   20.00
  2. 20.00                                   40.00
  3. 20.00                                   60.00
  4. 20.00                                   80.00
  5. 20.00                                 100.00
  6. 20.00                                 120.00
  7. 20.00                                 140.00
  8. 20.00                                 160.00
  9. 20.00                                 180.00
  10. 20.00                                 200.00
  11. 20.00                                 220.00
  12. 20.00                                 240.00
  13. 20.00                                 260.00
  14. 20.00                                 280.00
  15. 20.00                                 300.00
  16. 20.00                                 320.00
  17. 20.00                                 340.00
  18. 20.00                                 360.00
  19. 20.00                                 380.00
  20. 20.00                                 400.00
  21. 20.00                                 420.00
  22. 20.00                                 440.00
  23. 20.00                                 460.00
  24. 20.00                                 480.00
  25. 20.00                                 500.00
  26. 20.00                                 520.00
Now after that you have officially saved enough money to survive a week without a paycheck. Keep it up and year after year this savings will become bigger and bigger. It will also give more security if you put away more money. Let's say that you save $40 each payday. That will just allow you to get to that goal and security twice as fast. and on top of it none of my calculations took into consideration the small amounts of interest that is compounding in your bank account. Money that is given to you just for keeping your money in the bank. It will not be much but it is more than you would of had if you spent that money. 

I will leave you today with the calculations of keeping up the $20.00 per paycheck for the next several years without that interest factored in. That will come in another posting.

     Year   Amount
  1.   $520
  2. $1040
  3. $1560
  4. $2080
  5. $2600
  6. $3120
  7. $3640
  8. $4160
  9. $4680
  10. $5200
Now we are getting somewhere. You have gained security and the ability to grow your money even faster. I have not even taken into consideration compounding of interest, this this is enough for now.

Have the most wonderful day and don't forget to pay yourself.

Everything that I write are the results of my own research. I strive to provide the most accurate information possible and cannot be responsible for any errors. I am not an accountant or a fiduciary. Before investing or using any of my ideas it is advisable to consult a financial professional. I am not responsible for any financial loss that might occur through the use of my ideas. Do your own research and come up with your own answers. The examples that I provide are just that, examples and are meant only for the purpose of teaching cash flow and ideas for possible investments. 

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