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Money and Me: Grow money with no effort
Written by Marion Neubronner

I used to be angry once. I was angry at myself I did not have that much money set aside for the life I wanted even after working for 17 years. I was angry at my family and my school because I felt no one had told me about financial literacy and knowledge. In school, all I was taught was to study hard, get a job and be all set for life. Not true.

Only on hindsight and with more experience now, do I realize that I would be so much more happier financially now if I was aware of my negative money habits then. But it is never too late. I began my new best money habits three years ago and I am now on track and at peace with my choices over money and my goals.

What am I actually giving up?
In this article on saving, let us review what we understand about saving. Saving is even more important than earning. Many people earn quite a bit of money and yet they end up with very little left, while others start with less yet have a lot saved in the end.

Firstly, all of us need to save for the goals we want to achieve. From paying for your studies, to buying your friend a nice 21st birthday present, to going for a vacation, to daily events like dinner and paying for handphone bills, savings help us to meet those goals.

CULTIVATE GOOD MONEY HABITS: DON'T JUST DIVE IN WITHOUT AN OXYGEN TANK

One way to see how we save is to categorise what you do with your income, and how much goes towards these areas:

Spend

Save

Grow

Give

When we first start work full-time, many of us spend on things we always wanted as a kid but never had the chance to buy. I was a true shopaholic with 30 bags, 50 pairs of shoes, who knows how many racks of clothes, CDs and books, fancy meals, holidays, manicures and pedicures. It was fun for a while. However I soon found that my savings for the category ‘Grow’ was almost non-existent. This was when I wanted to go for my further studies abroad. My savings was measly. Before I left for my studies, I saw all my spending habits in a new light. Where I previously would not bat an eyelid to buy a $50 dress, now I would look at that $50 and divide it by the number of meals I could have in the States. When I realised I was literally throwing away about eight meals by buying the dress (which I would soon forget), I decided to save it instead.

Ask yourself before you buy something: what are you giving up instead? Rather than have a collection of books, you could use the national library and spend the money on the first installment on a new laptop.

Let compound interest grow your savings
Banks give us two types of interest:

Simple interest: calculated on the amount of money you deposit

Compound interest: calculated on your deposits plus any interest you've already earned

With compound interest, you earn interest on the interest that the bank pays out to you. So if you put $1,000 in the bank and the interest rate is 2 per cent, at the end of the month you get $1020. This will be the new amount that next 2 per cent is based on. This means you make $1040.40 in the next month. If you never withdraw the interest but let it add to the orginal deposit, you will earn interest on your interest as well as the first deposit. Talk about getting money to work for us.
Why is it so important for us to know about compound interest? Well, one thing about savings is that it favours the young. If we start saving at 17, the amount of money we make from compound interest is going to be larger than if we start saving at 37. In 20 years, the compound effect is huge. So it does not matter how small the amount is at the start or the number of years it stays with the bank. Let the interest roll to your benefit. The only thing we have to be aware of is that the interest rate should be better than the inflation rate.

Even a small difference of $30 a week can translate to large savings with compound interest.

The rule of 72
The rule of 72 is an easy rule you can use to work out how soon your savings or investments double with the help of compound interest.

Just divide the interest rate (or average annual return) by 72. The result tells you how long it will take for your money to double without further savings.

Example
You have $5,000 which is earning 3 per cent interest. Divide 72 by 3, and you get 24. This means that your $5,000 will double every 24 years. After 24 years your $5,000 will grow to $10,000. After 48 years, you will have $20,000.

To be completely accurate, we need to deduct from the interest rate to allow for inflation. If we allow for 1 per cent inflation in the above example, the real interest rate would be 2 per cent.

Find out more on compound interest here:
http://www.sorted.org.nz/home/sorted-sections/saving/the-power-of-compound-interest

Main insight
Start saving early to reap the full benefits of compound interest.
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