Making Sense of One’s Dollars

There is a quote often attributed to Albert Einstein about compounding interest. The verbiage changes a bit depending on who you ask, but it is said Einstein referred to compounding interest as “the most powerful force in the universe,” “eighth wonder of the world” or “mankind’s greatest invention.”

Whether the quote or attribution are completely accurate — it’s a source of internet debate — the sentiment about what compound interest can do for one’s finances is on point. If you start young and get that snowball rolling down the hill by saving, 30 years later that annual return is a significant number.

Financial planning experts have at least one rule of thumb when it comes to saving: Figure out how to live on 85% of your income, and save and invest the rest. That can be easier said than done for people who don’t have a massive income and start out living on 100%, especially in a time of inflation. Some people may want to start with putting 6% aside and work toward that 15%.

However, committing to living on 85% of what you make will set you up for success. The sooner you can learn to save and invest, the better.

Financial planners hear a lot of people say they wish they had started saving 15% 10 years ago. What they have never heard someone say is, “I really wish I wouldn’t have done that at 23 and banked this $500,000.”

People also need to recognize the significant differences between saving and investing. Savings remain available in a pinch or for bigger expenses, but people should expect to let go of their money for some time with investments. The trick is investing without leaving oneself cash-strapped — finding a happy medium of chucking some money into savings while putting some into long-term investments.

It’s not advisable to change 401(k) contributions because of a quarterly profit-sharing check, but a promotion or raise could be cause to re-examine long-term investments. A raise is an ideal time to up the percentage of contributions to a plan because it won’t be as noticeable a hit on one’s pocketbook