We have a tendency at times to store or to throw away small change (coins with very little value, like pennies, 10 cents, 25 cents and one dollar coins).
What some of us fail to understand is,that no matter how small the value of a coin is, it's still money. Money that if saved and invested wisely, can eventually rescue us when we really need it!
Just think about it...what if you took all the spare change you have around the house, bagged similar denominations together (that is, you put all the pennies in one small plastic bag, all 10 cents in another, etc.) and then took these bags to the bank or sold it to a shop (they're always in need of change) and used the paper money you got in return and put in a savings account (referred to as depositing the money)...
And then you kept depositing the money every two or three months...can you imagine the amount of money you'd have in that account after 20 years?
Let's do a little calculation to demonstrate (show you) my point:
Using the Compound Interest Calculator found at:
http://www.csgnetwork.com/compoundint2calc.html, and we'll explain each term.
a) Let's say your spare change added up to $100. So the original amount you deposited (your Original Principal) was $100.
b) You put it in a bank that gave you a 8% interest rate for the year (annually). That is Interest Rate = 8%
c) But, being the smart savers you all are, you deposit an additional $200 in the bank account, each year. (Thus, Annual Addition = $200)
d) You did this for 20 years. (Thus, Years to Build = 20)
e) And the money is compounded annually. (That is, interest is calculated on the money annually). That is, Annual Interest Compounding =1
In your 20th year you'd have accumulated $10,350.68!
Wow! from an original spare change of $100!
That's something to think about!
While this sounds great so far, there are some other issues that you must consider when you're saving or investing.
a) You must bear in mind the inflation rate. Inflation means increases in the price for goods you buy for your survival.
So if the inflation rate is 10% and the interest gained from the bank is 8%, the value of your money is actually decreasing. The reason for this is that the interest gained (8%) is less than the inflation rate(10%) and thus you cannot keep up with price increases of the goods you wish to buy to survive.
If you find that the interest rate given by the bank is lower than the inflation rate, you should shop around for legal investment opportunities that will give you a higher rate of interest (also called a return or gain) than the current inflation rate. - This is usually referred to as "beating inflation".
b) You must also consider taxes - some countries charge a tax on money stored in bank accounts or on money gained from investment activities. But they won't tax some government investment instruments like Treasury Bills or Municipal Bonds.
c) Your job is to find investment opportunities (a mixture of savings, certificates of deposit, stocks, bonds, government instruments, foreign currency, mutual funds,etc.) that are affordable (for you), beat inflation and are also tax-free (or have very small tax implications).
For beginners to investing, I highly recommend these two books, to help you to understand the world of investments and personal finance:-
1)"The Wall Street Journal Guide to Understanding Personal Finance", by Kenneth Morris and Virginia Morris.
This book is a great introduction to investing and personal finance and I use it as a quick reference guide from time to time. (It has a heavy US-slant, but the information is applicable and valuable, globally.)
You can purchase it here from Amazon.com:
2) "The Wall Street Journal Lifetime Guide to Money:Everything You Need to Know About Managing Your Finances for Every Stage of Life", by The Wall Street Journal's Personal Finance Staff. (This book tells you what instruments you should invest in during your 20' - 30's, 40's - 50's and your 60's and beyond.)
I use this book along with the first book (to find more in-depth information) and it has become my investment bible. (It is much more detailed than the first book and also has a US-slant, but the principles can be applied, globally.)
This can be purchased, from Amazon.com, below:-
You can also do your own research on the Internet, using sites like The Wall Street Journal and The Motley Fool or subscribe to on-line magazines like Forbes, FORTUNE,
SmartMoney
, Equities Magazine to sharpen your investment and personal finance knowledge
.
(All these these sites and magazines explain financial terms and give financial advice in simple, every day language).
Alternatively, or in most cases, additionally:
You may consult a certified, legal financial advisor (from a reputable firm). - Preferably one for whom you can track their (the company's, the funds they manage and your advisor's) performance, over a period of time.
Please be mindful that if you are using an advisor, he/she will charge for his/her advice and the management of your funds (usually called management fees). So when using an advisor, you have an additional task to ensure that the gains on your money, in addition to beating inflation, and being tax-free, also exceed these management fees.
No matter what route you chose to invest or save your money, it's always best to start as early as possible in life. So if you are a parent of a young child (or young children), you should be teaching them about saving their money as soon as they are able to understand what savings mean.
When they get a little older, you should introduce the concept of investment to them.
If you are an adult who hasn't been saving and investing your money, it's time to start now...no matter how small you may think the money is that you have - just look at our example of the penny saver, above!
I wish you all the best in your investment endeavours!
Please let me know how these resources have been helping you,ok?:)
(Please note that the advice given here does not substitute for advice from your qualified financial advisor/planner - please consult him/her for investment advice.)
Gillian