Compound Interest. Put Your Pennies To Work

The Power Of Compound Interest

Most financial advisors will tell you that the 8th wonder of the world is the power of compound interest.

Over the last 20+ years of investing even small amounts I could not agree more.  Compound interest is a remarkable thing.

They say all it takes to make a diamond is time and pressure and you can say the same about investing and building wealth. Investing is a great way to make your money work for you – even when you sleep!

This is about conscious choices. I realize as I talk to many of you, I have made choices that are different from most.  While this started when I was young, most of this is building good habits over time – stop buying $%#@ you don’t need (yes, I still have sacred cows) but we all live in a world of excess. Did you realize was one of the fastest growing industries is storage facilities?  Give up the $5 coffee and make it at home for less than $1.

Remember, life is a game never won or lost, only played!

Tip #1: Start Investing Now. The Biggest Factor Is Time

I can still remember the first 5 stocks I bought –  AOL, Exxon, General Electric, Johnson & Johnson & Boeing.  I was given a small gift when I was 16 and decided to invest it. It started with looking around and buying companies that I knew – the early days of the internet, gas and oil, the companies of products we used: toilet paper, light bulbs and Boeing, where my father worked.  It was that simple. Little did I know it would be the start of this fun, exciting journey. My advice, start small, buy value companies that perform over the long haul. The sooner you start the better. Small investments add up. The power of compound interest!

Tip #2: Invest Long Term. Buy & Hold Strategy

Yes, during our off sites, we continually look at our investment portfolio of stocks. We look at diversification, overall health and performance. For the most part, we have a buy and hold strategy. We have a healthy investment of stocks, but also believe strongly in low-cost ETFs, REITs and Mutual Funds. Be diversified. Today, we cost dollar average in every month and have stopped trying to time the market correctly. It’s not overly sexy but it works. No one can predict what the market will do. While I read the paper every morning and review Morningstar,  I stop worrying about market speculation and ride out the day-to-day fluctuations. I stay away from day trading and focus on the long-term. The power of compound interest!

Tip #3: Out Of Sight, Out Of Mind. Stop Buying Things You Don’t Need

I save thousands of dollars a year carving dollars off the top. Most analysts will say you need to save 10% a year. I would say in today’s world, target 20%. Even if you only save 75% of that amount you are outperforming.  Today, as a family we are averaging over 30% a year. Whether it be 401K, ESPP, HSA or even our regular contributions to our brokerage account, 529s for our kids, we set aside money before the check even arrives. I always learned the lesson that “out of sight was out of mind.” It sounds simple but many us simply ignore it. Remember a penny saved is two pennies earned.  Most think their only path is a 401K or retirement account, yet there are countless ways to save and those savings add up over years accumulating compound interest.

Tip #4: Automate Investing. It’s Never Been Easier

With technology, we have automated everything. I use our Mint account regularly, use Personal Capital for reviewing our Investments and retirement check-ups.  Don’t stop there. We use automatic investing for other accounts – brokerage accounts, 529s, HSA’s and 401K accounts. Yes it can be overwhelming but there is no excuse to start now. You would be amazed on what you can save and the excess you can live without. We all have $%&# we simply don’t need. The power of compound interest!

Tip #5: Use Professionals Where It Makes Sense

For the first 20 years, I did everything myself. I had my picked and chose my own stocks, I did my own taxes and other than some tough life decisions (e.g. a divorce) I had never used an attorney. Today, my 3 best professional friends are our financial advisor, accountant and lawyer.   This was as shift to value over cost. Over the last 5 years, the areas we focus on are our long-term tax strategy, medical and health insurance costs and family planning like wills and trusts. These are huge decisions that you don’t get to do over. Use professionals and spend wisely to find the right information now as it can save you in the long-term. No different from going to the doctor for medical help, using professionals wisely for financial planning is important. Don’t cut costs but be prudent in who you choose.

Remember that life is a game never won or lost, only played.