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Invest
Smart. Rest Easy.
Do you want to be wealthy?
Most people do. It usually takes a
lot of patience, however, to
achieve wealth. Most of us will not
win the lottery, earn
astronomical salaries playing for the NBA,
or create a business
in our garage that turns into Microsoft or Hewlett Packard. But
if you are patient and use time to your advantage, you can
accumulate wealth. You even could be a millionaire one day.
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Savings
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COMPOUND INTEREST
One way to reach this goal is by investing and saving
wisely. Investing or saving in funds or accounts in which
the interest is compounded eventually will double your
money. The earlier you start your savings plan and the
greater the interest rate, the sooner your funds will
double.
Let’s use an example to illustrate how compound interest can
work to your advantage. How long will it take an initial
investment to double at interest rates of 2%, 6%, and 8%
that are compounded annually? You really don’t need a
complicated formula to figure this out. All you need to do
is divide each interest rate into the number 72. Thus, it
will take 36 years for your money to double at 2% compounded
annually (72/2=36); 12 years at 6% (72/6=12); and nine years
at 8% (72/8=9). So if you invest $10,000 in a fund at 8%
interest compounded annually, the fund will grow to $20,000
in nine years.
RULE OF 72
Investors call this simple formula for doubling money the
Rule of 72. It provides an approximation of how much time it
takes for money to double at any interest rate that is
compounded annually. You also can use the rule to figure
what interest rate you need to reach a target.
For example, if you would like to see your money double in
10 years, divide 10 into 72 to find the interest rate of
7.2%. In actuality, your money will double much faster if
you invest it in an account that compounds quarterly or
monthly. You also would be wise to periodically deposit
money into an account. That way, not only does the base, or
original amount of money double over time, so too, does each
additional amount.
PLANNING FOR WEALTH
A 22-year-old who initially invests $10,000 at 2% interest
and adds $300 each month for 45 years will have almost
$300,000 by age 67. If the money earns 6% interest, the
amount would be roughly $1 million by age 67 and nearly $2
million if the interest rate is 8%. But be aware: interest
rate fluctuations, inflation, fees, or taxes can change
investment earnings. Banks periodically adjust their
interest rates up or down for savings accounts. Inflation
lowers the value of money. And account fees as well as
federal and state taxes on the interest earned each year can
reduce overall earnings.
MAKE THE MOST OF A 401(K)
A way to realize the gains that interest earned over time
can provide is to contribute the maximum to tax deferred
accounts like a 401(k) retirement savings plan. With a
401(k), your contributions are automatically deducted from
your paycheck and reduce your current taxable earnings. You
defer paying taxes on your plan contributions and earnings
until you begin to make withdrawals, typically in
retirement.
Many employers match employees' contributions, which equates
to getting free money. Employer contributions are added to
your own savings and are not subject to the employee
contribution limits.
A good savings and investment program should be part of your
plan to accumulate wealth. Other things to help you toward
that goal include getting a decent job, owning a home and
using credit wisely. If you do these things, it’s possible
to reach retirement age with at least $1 million in assets —
and probably much, much more.
Created by
the American Institute of Certified Public Accountants and
the California Society of Certified Public Accountants. |
Brought to you by the North Carolina Association
of Certified Public
Accountants as part of its financial literacy
initiative, a community outreach program dedicated to improving the
financial standing of all North Carolinians.
The North Carolina Association of CPAs :: PO Box 80188
:: Raleigh, NC 27623-0188 :: (800) 722-2836 ::
www.ncacpa.org |
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