The Magic of Compound Interest (Carole)

When you are investing money, there are two basic types of interest your money can earn:  Simple Interest and Compound Interest.

Quickly, let's look at the difference between these.

Simple Interest 

(Interest is only calculated on the money you have invested):  

If you invest $10,000 (your principal) at 5% interest for 20 years:

$10,000 x 5% x 20 years = $10,000 (interest earned) 

Add this interest earned to your original $10,000

$10,000  + $10,000  = $20,000

Compound Interest 

(Interest is calculated on your invested money PLUS your previously earned interest):

If you invest $10,000 (your principal) at 5% interest for 20 years with compound interest  you'll end up with $26,532.98 .   


The formula is a bit complex and hard for me to type out, but you can look it up here if you just really need to see it for yourself.

In addition:

The more often  your compound is calculated (daily, monthly, yearly) the more interest you will earn.  Daily Interest = $27,180.96
Monthly Interest = $27,126.40
Yearly Interest = $26,532.98

The longer your money is invested the more interest you'll earn.  Your same $10,000 at 5% for 30 years turns into $43,219.42   Same money, same interest for 40 years is $70,399.89

The higher your interest rate, the more interest you'll earn.  Your same $10,000 at 10% for 20 years will become $67,275.00

Combine longer time and higher interest and it starts to get really fun:
$10,000 at 10% for 30 years =  $174,494.02
$10,000 at 10% for 40 years =  $452,592.56

$10,000 at 12% for 20 years =   $96,462.93
$10,000 at 12% for 30 years = $299,599.22
$10,000 at 12% for 40 years = $930,509.70  (yep, nearly a million $)

Imagine if you could scrape together only $10,000 by age 20 and find a good mutual fund that paid 12% interest (not that difficult really) and just LEFT YOUR MONEY THERE until you were 65 years old, you would have $1,639,876.04   That's without you ever adding one more cent of principal to this investment.  The sooner you can get investing in something earning a decent interest rate, the better off you will be at retirement.


That is magic.  If you want to work some magic yourself, here is a compound interest calculator.  I'll warn you -- it's addictive!

P.S.  Your mortgage (or car payment, student loan, credit card bill. . .) works on a compound interest formula in your lender's favor.  That is why you often end up paying 3 times the cost of your house by the time your loan is completed.

CSN Giveaway

While we all sit around waiting for my baby to arrive (you are all sitting around waiting for my baby to arrive, aren't you?), we thought it'd be fun to do another giveaway.

We're giving away a $50 gift certificate to any of the 200 online CSN stores. They sell, almost literally, everything you can possibly imagine.

Since I'll be moving to a bigger apartment soon (expect some "moving without selling your firstborn child to cover the expenses" posts soon), with a kitchen where the fridge can open all the way, I may be spending a little too much time looking at all the fun dishes that I'll actually have room to store in my new kitchen (no matter what else gets the axe, my beloved Le Creuset dishes from my great-aunt at our wedding will be making the trip back to Texas with me).

Frankly, I don't even KNOW what I would choose if I won, because there are so many options. Baby furniture might also be toward the top of the list for me. . .

If you win, you can use your $50 toward any last thing you desire and the options are many.

To enter, leave a comment telling us something you do well financially - we want to hear about your successes! We'll randomly choose a winner over the weekend and announce on Monday!

This is only open to residents of the US and Canada. This contest is sponsored by CSN stores.

Food Storage (Merrick)

When we did our 100th Post Giveaway, someone commented about food storage, and it got me thinking. I grew up in a home where my dad was a huge food storage guy. We drank powdered milk, made wheat bread from canned wheat, and froze large quantities of fruit from the trees in our garden. But growing up this way isn't the only reason I'm an advocate of food storage; here are a few other reasons:

1. Having food storage can decrease your weekly purchases at the store. Food storage doesn't have to be, and shouldn't be, only lentil beans and potato pearls -- it should be things that you want to eat and will eat. It's the "overbuyer" concept. When I make up my weekly menu, I go through my list of ingredients and see what I need and what I already have. If I purchased extra canned tomatoes or cream of chicken soup when they were on sale a few weeks back, that is one less thing I have to buy this week. Or if my budget is tight on a particular week, I can look in my pantry and build my menu around pasta or canned green chilies that I already have. If you're a couponer, use those coupons or wait for the big sales, and stock up on items you know you will use. Then when you go to make your grocery list, you will already have half of the ingredients.
2. In this economy with frequent layoffs and salary decreases, it's nice to have a food cushion. I know several people who have lost their jobs and have been able to live very cheaply because they can live off their food storage for a few weeks or months.
3. With all of the earthquakes, hurricanes, and other natural disasters that have hit so many people recently, there is no doubt in my mind that a little extra food in your pantry is a good thing, just in case you can't get to the grocery store for a few days.

Now obviously the nature of this blog is saving money, and building food storage costs money. But as I mentioned above, wait for the sales (especially caselot sales), use coupons, or just buy two cans of beans instead of one each week, and soon you'll be on your way to a nice supply of food without breaking the bank.

Small Savings: Printing (Janssen)

When you're trying to live frugally, you can save on big-ticket items (a car, a house, a vacation, etc) or on smaller items (groceries, clothing, eating out, etc).

The savings you'll see if you buy a less-expensive car is far more than you'll probably see at the grocery store (I hope - maybe you buy really expensive groceries), but you'll probably go to the grocery store hundreds of times for every one car purchase, which means the savings you can get at the grocery store, while only a few dollars a time, can really add up over time.

One of the places I save a little money is with my home printer. We're not talking hundreds of dollars of savings here, but it is a place where we can cut costs a little bit with no real effort on our parts. We do this in two ways:

1) We realized last fall that 99% of our printing is done for things that don't require any particularly nice paper. It's just directions from Google Maps or grocery coupons or boarding passes for an airplane trip. Instead of buying packs of paper for a few dollars at Wal-Mart or the grocery store, we started hoarding all the paper that entered our house that was blank on one side. It became immediately obvious how MUCH paper we got. A calendar from church, a credit card offer in the mail, a letter informing us what precint to vote in. And then, we started bringing some home from work - the notices I got at school alone filled up our printer tray in a matter of days.

The grocery store doesn't care if my coupons have the date of the next PTA luncheon on the back. I can get to my destination just fine if my directions are printed on the back of my privacy policy notification from the bank.

2) As I said above, we realized that our printing rarely needed to be high quality. Printer ink is fairly expensive, so we hate to waste it. We went on to our computer settings and changed the automatic mode for our printer to "Fast Draft," rather than high-quality. The quality is still perfectly fine - I have no problem reading anything and it's sharp enough for the scanners to read the barcodes on my grocery coupons - but it uses a fraction of the ink and, bonus, prints FAR faster and your paper isn't warped from all that ink. Win-win.

I'm certainly not going on a cruise with these savings, but it's less trips to the store and less money out of my wallet.

Are You an Underbuyer or an Overbuyer? (Carole)

Currently, I'm reading  The Happiness Project by Gretchen Rubin.  Have any of you read it?  Read it if you get a chance.  It will make you laugh -- and think.

Even though Gretchen is a Yale trained lawyer (whoa!), she is also a pretty ordinary wife with two little girls.  One day she came to the realization that even though "the days were long -- the years were short" and she was not really enjoying her daily life as much as she thought she should!  You too??   After tons and tons of some pretty highbrow (and some lowbrow) reading, she embarked on a year-long "project" to find more happiness in her daily life.  I won't give away her many many insights (told in a very readable style), but I will share one interesting concept relating to money that you might find useful from Chapter 7.   Here's what she has to say, When I began to pay attention to people's relationship to money, I recognized two different approaches to buying: 'underbuying' and 'overbuying.'  I am an underbuyer, I delay making purchases or buy as little as possible. . .I often consider buying an item, then decide, 'I'll get this some other time' or  'Maybe we don't really need this.'  As an underbuyer, I often feel stressed because I don't have the things I need.  I make a lot of late-night runs to the drugstore.  I'm surrounded with things that are shabby, don't really work, or aren't exactly suitable.  


She goes on to say, I gaze in wonder at the antics of my overbuyer friends.  Overbuyers often lay in huge supplies of slow-use things like shampoo or cough medicine.  They make a lot of purchases before they go on a trip or celebrate a holiday.  They throw things away -- milk, medicine, even cans of soup -- because they've hit their expiration date.  Like me, overbuyers feel stressed.  They're oppressed by the . . . the clutter and waste often created by their overbuying.


Gretchen eventually recognizes that there must be a happy medium and that it probably lives more in the camp of the Overbuyer:  I knew that I'd be happier if I made a mindful effort to thwart my underbuying impulse and instead worked to buy what I needed.  For instance, I ended my just-in-time policy for restocking toilet paper. . .As Samuel Johnson remarked, 'To live in perpetual want of little things is a state, not indeed of torture, but of constant vexation. . . I realized that the paradoxical consequence of being an underbuyer was that I had to shop MORE OFTEN, while buying extras meant fewer trips to the cash register.  I bought batteries, Band-Aids, lightbulbs, diapers -- things I knew we would need eventually.  


Do you recognize yourself in any of this??  Are you an Overbuyer or an Underbuyer??  I have been a life-long sad, sniveling underbuyer -- just ask my girls.  Constantly out of vacuum bags, light bulbs, tooth paste, pepperoni, chocolate chips (well, I might be short of this last one for a very different reason than not buying them).  And the list goes on and on.  On the other hand, living in a galaxy far far away, I have a lovely friend who is a very wise Overbuyer.  She keeps an entire box of  paper (filled with a dozen reams!) nestled safely near her printer.  She purchases charming birthday cards 20-30 at a time and even has ten spare deodorants in her bathroom closet!  She is prepared, prepared, prepared -- and smells good too!  I've always wanted to be like her, but could never quite figure out before what the difference was between us.  Mystery solved.

I'd love to hear how you buy and if it really makes you happy.

Multiple Streams of Income

For the first year and a half of our marriage, I was still in school finishing up my bachelor's degree. Although Philip was working full time, his starting salary was somewhat small, and with the cost of school, plus a mortgage, our savings was doing anything but increasing.

Once I graduated, I immediately began a full time job. The difference in our bank account was unbelievable. With both of us working, we were suddenly saving a huge amount of money, and happily watching our bank account grow for the first time in months.

But we didn't stop there. We realized the value of multiple streams of income, and since then we have continually been on the lookout for extra income opportunities. For example, last summer I made and sold many embellished t-shirts. We frequently go through our house and find unwanted or duplicate items that we can sell on craigslist or at Plato's Closet. I have also made and sold headbands, clips, and hair ties.

Now, since I no longer have a job because I stay at home with my baby, I do commission artwork, and recently began teaching children's art lessons, which brings in quite a bit of extra cash.

Already having a job, or being a full-time mom shouldn't stop you from finding other methods of income, because every bit makes a difference.

If you sit down and think about it, I'm sure you can come up with something simple and not too time consuming that you could do to earn extra money. You'll be amazed at the difference even $10 a week can make to your bank account.

Any great ideas??

Financial Goals (Janssen)

Two months ago, my husband and I paid off the last of our student loans, making us completely debt-free. It was glorious.

Once those were gone, though, we had to figure out what our new financial goals were. This was a little tricky because now instead of having one single-minded purpose for any extra money, we had so many categories we could consider - investing, emergency funds, vacations, a new baby (that makes it sound like we are saving to buy a baby. . . ), cars, etc.

We sat down together, looked over our finances and our budget and decided that our priorities were the following three:

1. A fully-funded emergency fund. Following Dave Ramsey's steps, we had previously had an emergency fund of $1000 before we began pounding away at our student loans. Once you're done with your debt, however, he recommends an emergency fund that could support your family for 3-6 months. We reviewed our budget and decided what that amount was for us and started working away at it as quickly as we could. The good thing about this goal is that it has a finish line - once we got that dollar amount in the account (actually, we have it spread out over several accounts at different banks), we could just leave it and move on to our next goal.  
2. Long-term investing. We significantly increased the amount of money we contribute into my husband's 401(k). Because time is on our side at this point, we wanted to take advantage of that, as well as the match that his company provides. 
3. A down payment fund. We currently are renters and probably will continue to be for the next several years, as we don't want to buy another house until we are certain we will stay in it for at least five or more years (we owned a house in Texas for three years and even after selling it for more than we paid for it, we still would have come out ahead if we'd continued to rent for those years - a house is a money pit). Our goal is to have a down payment of 20% since this would allow us to avoid paying mortgage insurance. We have a fairly good idea of how much the kind of house in the locations we're considering would cost us, so while we don't have as solid a number as we do for our emergency fund, it's a pretty accurate ballpark figure, I think. 

It's not as easy to figure out how to approach these goals as it was with our student loans since we knew it was a short time period where we could be incredibly focused. We're less interested in sacrificing all fun for several years than we were in making do on very little for six months. On the other hand, knowing what our long-term goals are and what the payoff will be, it's easier to be a little more careful and a little more frugal.