WHEN IT COMES TO FINANCES, HOW MUCH DO YOU KNOW?
A majority of people know little to nothing about personal finance. Perhaps you think long-term security is impossible on your income.
However, no matter what your income level is, it is possible for you to achieve financial security. You just have to take the time to learn a few simple principles about how money works.
Types of Retirement Planning
Simple vs Compound Interest
KNOWLEDGE IS THE POWER
Simple interest is a very basic form of interest. It is the interest gained from the original capital over certain time periods. For example, when you invest $10,000 with a simple interest of 10%, then you will receive $1000 in the first year (10% of $10,000 is $1000). You will continue to receive $1000 the following years as long as the simple interest rate remains at 10%. Despite the increase of your principal amount, the interest gained will remain the same.
Compound interest is the method in which interest is added to the principal or loaned money after each time period. The interest that has been added to the principal will also earn interest. For example, if you invest $10,000 with a compound interest rate of 10%, you will receive $1000 in the first year (10% of $10,000 is $1000). In addition, you will receive $1100 in second year (10% of $11,000 [new principle] is $1100). The following year you will receive $1210 from the 10% interest gained from the new principal of $12,100. It is not significantly different from a simple interest in the short term, but after longer periods of time you will have an exponential growth in return. On the other hand, if the credit card has a higher compound interest rate, debt will grow much more quickly.
THE RULE OF 72
Do you know the Rule of 72 and how it works? The Rule of 72 is an easy way to approximate how long it will take to double your savings when you earn compound interest. Just divide 72 by the interest rate you earn to determine the number of years it will take your money to double. By using the Rule of 72, you can see why it pays to fight for every extra percentage point of interest you can get. Once you know your rate, use the Rule of 72 to compute how fast your savings will double!
INFLATION / TAX
Typically, people overlook two things when earning money. One is inflation and the other is taxes. You need to understand these concepts fully, in order to see if your money will grow as desired. If you have a child and you are planning to save $100,000 for college funds and consider neither inflation nor taxes, you won’t be able to attain that amount. Never forget the effects of inflation and taxes.
When you are young, you may have children to support, a new mortgage payment, car loan and many other obligations. However, you haven’t had the time to accumulate much money. This is the time when the unfortunate death of a breadwinner or caretaker could be devastating. This is also the time when you need coverage the most.
When you are older, you typically have fewer dependents and fewer financial responsibilities. In addition, you’ve hopefully had years to accumulate wealth through saving. At this point, the need for insurance has reduced dramatically, because you have your own funds to see you through your retirement years.
The problem lies within the fact that when a person is young, death could mean the financial ruin for the rest of the family. In contrast, living too long might mean that the savings or retirement funds that one has set aside might run out, ultimately resulting in the dependency upon others. One of UNI’s goals is to help protect against situations such as these.