There are several financial concepts and strategies you can use and implement that will grow your money and accumulate cash value.
Some concepts that you should know in order to build your savings are compounding interest, types of investment strategies, and how money is taxed.
Let’s discuss….
Compound Interest
How can compounding interest help grow your money?
Well, first of all, you earn interest on top of the interest you’ve already earned. Second, compound interest plus a high rate of return can double your savings in a shorter time period based on the Rule of 72. The rule of 72 tells us how long it will take to double our money (72 divided by the interest rate).
Let’s take a look at an example.
If you save $10,000 in an account that pays you 1% interest, then it will take you 72 years (72/1) to double that.
If you invest $10,000 in an account that gives you a rate of $12%, then you double your money every six years (72/12).
Imagine! If you saved $10,000 at 29, how much would your money have grown by the time you are 65? Well, you’d have approx. $640,000. That is over half a million dollars with compounding interest.
Investment Strategies
Saving your money on a fixed strategy like a savings account is a very safe and conservative way to grow your money. You will earn a fixed interest rate and you won’t loose your money. However, going back to the rule of 72, what interest rate are you getting and how long will it take you to double your money?
If you’re investing in the stock market, you can earn very high gains when the market does very well but you can also loose a lot of money when the market is down. This is called a variable strategy.
Here’s another investment strategy that you might not have heard of: Indexed strategy.
An indexed strategy is a combination of a fixed and variable strategy. Your money earns and grows at a particular rate of return, and then remains stagnant when the market goes down. Stagnant meaning you do not loose money when the market is down but you don’t gain anything either.
With an indexed strategy, your money is not invested in the market. Rather, it is tied to and performs alongside an Index such as the S&P 500, the DowJones, NASDAQ, etc.
One important feature that keeps you from loosing money is a floor rate of 0%.
How is money taxed?
There are three different ways that your money is taxed: Tax now, tax later, and tax advantage.
Tax now means your money is always taxed, from the moment you start saving, to the interest you receive, to the time you cash it out. Some examples of tax now accounts are bank accounts like savings and certificate of deposits, as well as stocks and mutual funds.
Tax later means just exactly that. You pay the tax later. These types of accounts are known as tax deferred such as 401(k)’s, annuities, pensions, IRA’s. When you contribute to these types of accounts, you contribute with tax free money. However, since you are not paying taxes upfront that means you will eventually pay taxes at the end. Think about it. If you save $1 million dollars in your 401(k) and it’s time to withdraw that money when you retire, how much of that money is yours and how much will be taxed? And what do you think your tax rate will be in the future? High or low?
Tax advantage accounts include municipal bonds, Roth IRA’s/Roth 401(k)’s, cash value life insurance, and executive bonus plans. In these accounts, you pay taxes on your money upfront and then deposit that money to a tax advantage account. That money grows and grows and grows. And when it’s time for you to take it out, every dollar is yours to keep simply because you had already paid the taxes.
In the end….
Now that you know this information, how do you want your money to grow? What investment strategy makes the most sense to you? And how do you want your money to be taxed?
If you’re unsure, then it’s time to meet with a financial professional. Talk to a financial professional and ask what plan you can start to help grow your money!
Schedule an appointment with Financial Planning With V and discuss how you want to accumulate cash.
You can also send your questions to FinancialPlanningWithV@gmail.com.
