Part 1- Simple vs. Compound Interest - Part 2 - How Can I Make My Money Grow? - Part 3 - Time Is Money!

Time and compounding: Start Early, Save Big!

Let’s take a look at an investor who wants to start their money growing using the power of compound interest. I recently discovered a fun calculator on the ING website (no, I don’t profit from directing you there, I just thought it was a great calculator), so I’ll be using that for the following examples. You can find it and follow along HERE.
Let’s assume the following for our young investor:
• She invests and initial amount of $1000 on her 20th birthday.
• She will be able to invest $2100 a year (in payments of 175$ a month) from now until she’s retired.
• She plans to retire in 40 years, at age 60.
• She also will earn an average yearly rate of return from her investments (another way of saying interest rate) of 10%.
You can see where I’ve inputted these numbers in the calculator below.

Press calculate to see the result!

At age 60 our investor will have $1,160,239.59!
Of that, $1,075,414.59 is pure interest.
92.68% of her money is pure interest.
The total investment form her pocket is a mere $85,000.

You can click on “show table” on the bottom to see exactly how much she will have every year from the time she is 20 to the time she is 60. Here’s an example of what she’ll have accumulated in savings and how much of that is interest from years 6 to 15 (if you’re following along you can scroll down to see more).

Nice isn’t it?

But wait, there’s more! Remember how I said time was important when it comes to compounding? What if our same investor did the same exact same thing, but waited until she was 30 to start investing her $1000 plus her 175$ every month?

With 30 (instead of 40) years until retirement, her nest egg will look very, very different…

Oh SNAP! By delaying her investing by ten years, she end up with less than HALF of the end amount she would have earned if she’d started 10 years earlier!

This is one of the great lessons of compound interest: time matters. The sooner you start, the longer you money ahs to compound upon itself. This is why it’s so important to START AS SOON AS POSSIBLE!

So if you’re young, you have all the more reason to start investing: it’s not something just for rich old farts any more!

A Word Of Caution:

Always do your research before you invest anything anywhere. BTG has reviewed some great books to help you get started towards financial literacy, and remember: you can always hire a fee only financial planner to help you figure out what kinds of investments are right for YOU. Index investing may not be for everybody (though you should definitely consider the possibility!). You can search for a fee only financial planner in your area by heading over to one of these links:

Canada:
http://www.canadianbusiness.com/my_money/planning/article.jsp?content=20061024_095045_5484
http://www.cfp-ca.org/public/public_findaplanner.asp I am a student associate of this organization

United States

http://www.cfp.net/search/

Part 1- Simple vs. Compound Interest - Part 2 - How Can I Make My Money Grow? - Part 3 - Time Is Money!

Part 1- Simple vs. Compound Interest - Part 2 - How Can I Make My Money Grow? - Part 3 - Time Is Money!

How Do I Start My Money Compounding?

Now, when I say compound interest is free money, well, I’m sort of bending the definition a bit. You have to do things in order to get this free money (no such thing as a free lunch, remember!)

The easiest, and safest, way to start growing your money via the power of compound interest is to simply…leave it in the bank! When you leave money in the bank, it’s like you’re money to the bank. Just as you would have to pay a loan you took from the bank back with interest, so too must they offer you something for keeping your money in THEIR bank, and not the one down the street (or not at all). We’ll go over this more in a future article, all about how banks work (coming soon!).

The trouble is, banks don’t offer much interest. In most cases the interest earned on your savings in a bank account will not outpace inflation. If you’re lucky, a high interest savings account will offer 3.5%, but that can change from month to month depending on the economic climate.

Many people then, seek to take advantage of the power of compound interest by investing. There are different ways to invest, but to keep it simple, let’s assume you’ve decided to invest your money in a low cost index fund.

Low cost index funds are mutual funds that are specifically tied to a market index like the S&P500, the S&P/TSX60 or the Wilshire 5000. These are used as broad indicators of how the whole stock market is doing at any given time: this is what you will see reported on every night on the news. The index fund tracking a particular index will only buy the stocks that are in that market index, in exactly the same proportion: the goal is to try to follow the WHOLE market, instead of trying to pick and choose stocks within it. This is, according to some very prominent thinkers and investors like Burton Malkiel, John Bogel and yes, even Warren Buffet, probably the best investment vehicle for the average person (though always talk to your fee only financial planner first!).

The stocks that make up the S&P500 have historically returned about 10.4% per year (this becomes a real return of about 7.2% when you factor in the average inflation rate in that same time period (source)

So investors take money they would otherwise spend, or put in the bank, and invest it in this index fund. They do this because they are expecting a higher return from investing (10.4%) than they would get from the bank (3.5%) or from spending it (0%, assuming it’s not spent on things that will make them money).

Now remember when I said compound interest can make you HUGE sums of money? This is due, in part to the rate of return you get. You’ll make more money if your money is compounding at an average rate of 10% than you would if you were earning an average rate of 3%!

An equally important factor in how much your money is able to compound is TIME itself. Simply put, the longer you have the more you’ll make!

Let’s find out why in part 3!

Part 1- Simple vs. Compound Interest - Part 2 - How Can I Make My Money Grow? - Part 3 - Time Is Money!

Part 1- Simple vs. Compound Interest - Part 2 - How Can I Make My Money Grow? - Part 3 - Time Is Money!

Last lesson we looked at Inflation, the silent killer that slowly but surely erodes your purchasing power. Recall that there was a happy ending to our story: there is a way to combat the perils of inflation. It’s called compound interest.

What is compound interest?

Simply put, it’s free money.

Let’s start by the simplest example: keeping money in the bank.

Recall BTG’s “How Can I Make More Money?” article; you may remember the case where I showed you how my sister could make more money for doing nothing but letting her savings rest in the bank. The example was in that case was of simple interest, but we also touched inadvertently on the principal of compound interest, that is earning interest ON interest that you’ve already earned. Let’s take a look at the differences between simple and compound interest:

Simple vs. Compound interest 

Simple interest is interest paid only on the principal (original amount that you invest or borrow).

For example:

$100 at 10% = $110 dollars at the end of one year

At the end of year one, you take your $10 and put it in your wallet. You decide to reinvest the original $100 for another year at 10%:

$100 at %10= $110 dollars at the end of year two

You put the $10 earned in interest from year two and put it in your wallet. Your wallet now holds $20.

$10 interest from year one + $10 interest from year two = $20 earned interest in total. So via simple interest, your original $100 has earned you $20 over two years in interest.

Compound interest is interest paid on the principle AND any reinvested interest.

For example:

$100 at 10% = $110 dollars at the end of one year 

At the end of year one, you decide that instead of keeping the $10 worth of interest in your wallet, you’ll add that to the amount that you decide to invest for the second year.

Therefore in year two, the principal amount is $110. You decide to invest the $110 (100 plus the $10 you made in interest) for another year at 10%:

$110 at %10= $121 dollars at the end of year two

At the end of year two you decide to take a look at how much interest you made each year.

In year 1, you made $10, but instead of putting it in your wallet, you wisely decided to reinvest it.

In year two you made $11 dollars, which is a full dollar more than you would have had had you not reinvested the interest in the first year.

So:
$10 interest from year one + $11 interest from year two = $21 earned interest in total

You earned $1 more simply by reinvesting your interest and letting it compound for another year.

Basically, because there was more money in the second year to begin with ($110 instead of just $100), there was more money on which interest could be earned, and so the amount of interest you earned was greater.

Think of it this way: X% (where X can be ANY number!), of $110 will ALWAYS be larger than X% of $100.

Added up over time, this can mean HUGE amounts of money in interest earnings for you. That is the power of compound interest.

So then, how do we start our money compounding? Find out in part 2!

Part 1- Simple vs. Compound Interest - Part 2 - How Can I Make My Money Grow? - Part 3 - Time Is Money!

If you decide to provide a service for people, you will be confronted with the fundamental problem that all businesses face: you have to find a need and try to fill it.

Think of your immediate community (ie: your neighbourhood, apartment block, school, youth groups, religious groups, etc…). What kinds of people live there? What kinds of needs do these people have?

Let’s say you live in an apartment complex. You know that in a few of the apartments are older people who have trouble carrying their groceries to and from the store, and don’t much like to do it themselves. They have a need: the older people need help carrying groceries. You can help fill this need: you are able to walk to and from the grocery store with their groceries without much difficulty.

You could therefore, offer to get groceries from the store for them on a weekly basis. You could charge a fair price for this too: say $5.00 a bag, or perhaps $25 for the week (remember, lots of people are on fixed incomes, so in this case you’d have to keep the financial needs of your clients in mind when you’re pricing your services, because anything too high will mean they won’t employ you).

Alternately, you could offer to accompany them to the store and carry the groceries on the way back!

If you had 7 people in your community who signed on for this service for $25 dollars a week, you would make $175 (25×7=175). If you manage to deliver groceries to people on a different day every week, you probably wouldn’t have to spend more than a couple of hours a day buying and transporting the groceries. Of course, if everyone wants their groceries delivered on Saturday, you may end up having to take a bit longer.

But you are your own boss: you can take on as many clients as you want. If you only need an extra $25 dollars a week, just take on one client. If you want $200 dollars a week, you’d need 8 clients.

Also remember: just because you’re your own boss doesn’t imply you should simply quit after you have all the money you need, say for an iPod or a laptop. Remember that you now have people who like the service you provide, and clearly still have a need for it. If you stop, they may be disappointed, and less likely to become clients in the future if you ever decide you need money again.

You can always set limits, but be sure to tell your clients.

Don’t be shy in saying that you’re on vacation until exams start up, or until school starts again, or whatever, and for the next 8 (or 10, or whatever you decide) weeks, you will be providing this service: would they be interested?

We used grocery transportation in our example, but you could do this with many other services as well, such as:

• House/baby/pet sitting
• Dog walking while owners are at work (one less thing for the owner to worry about!)
• Organizing garages (no more clutter! No more mess!)
• Watering gardens (owners won’t have to deal with messy sprinklers!)
• Weeding lawns (this is actually harder than it sounds though)
• Wash cars
• Collect bottles and cans for/from people!

After Googling a bit, I found a few other suggestions I hadn’t thought of. These are from the Motley Fool:
http://www.fool.com/teens/teens02.htm

• Caddy at a golf course
• Teach something (teach what you know – tutor school children, teach piano, etc…)
• Deliver newspapers
• Computer services

Remember: only deal with people you trust if you have to enter their homes!

If you can fill a need, you can charge for it!

A note about surveys:
Whenever anyone posts a question like this on Yahoo! Answers, there’s always a few trolls who come out and post links to various survey sites. I really wouldn’t recommend surveys, for 2 reasons.

1) If you’re not “legal” to work in real life, remember it may not be legal for you to work for one of these survey companies.

2) Working on the internet takes WAY more time and effort than you think. I know this from personal example. I had been working on BTG for almost 10 weeks before I made my first quarter in advertising revenue (to be precise, I made $0.26). I write an average of two hours a day for the site, and that’s not counting the average of two to three hours a day extra in reading, learning, and site maintenance that running a website requires. And that’s after I finish my regular work. I love my job, but one shouldn’t expect to make much money per survey or per click online either: if it was really that easy for someone with no skills (in our case, younger people) to make a ton of money from surveys, you’d probably notice a lot more rich 13 year olds.

Your number 1 job: being a student:

In the immortal words of my parents: if you’re in school, you already have a job; your job is to be a student.

If you’d read the “How Can I Make More Money” personal finance article, you’d already know that getting educated or becoming skilled in a trade is the best way to earn more money in the long run. But in order to do that, you have to do certain things: you may have to study for certain qualifications, or you may have to get certain grades to enter into schools or programs later on.

My advice: if a job on the side is going to impact negatively on your schoolwork, don’t do it. It’s much better for you in the long run: nobody is going to care that your grades dropped so you could make an extra $200 bucks for an iPod on your college apps, they’re just going to care that they dropped (especially in countries where competition for certain spots is fierce).

You may, though, be able to turn this to your advantage: if your parents have the means, consider asking them for a wage while you are in school. After all, you’re working, and working very hard at your primary job, so why not be paid a little for it if you can (if you can’t get an allowance and you’re knowledgeable in a subject, consider tutoring!).

Good luck!

Part 1- Selling Things - Part 2- Selling a Service

Part 1- Selling Things - Part 2- Selling a Service

This article was directly inspired by the dozens of teens on Yahoo! Answers who have, in various ways, all asked the same question:

How can I make money if I’m too young to work?

There’s two ways:

1) Selling Things

2) Selling Services

Selling Things:
This is best if you need a set amount of money. For example: if you know you’re not going to want to continue earning money after you have earned $200 for an iPod, you’re better off trying to get the money in ways that do not require a commitment to anyone you’d be providing a service for (more on that below!).

Take a look around, see what you can sell (always make sure you have permission first!).

Some things you can sell include:
Used books to a used bookstore (or online with a trusted adult)
Used video games to a game store (or online with a trusted adult)
Gently used clothing
Items in good condition

If you’re crafty, you can also make things to sell, and try to sell them at community events or door to door. This can be difficult however, not everyone needs a macramé bracelet.

For those of you interested in trying to seel some of your old thinsg online, you should definately check out “How To Sell Your Stuff On Ebay” over at FiveCentNickle.

What if you have a larger goal in mind, like saving for college, or buying a very expensive item? This brings us to the second way you can earn money: you can sell a SERVICE.

Let’s find out more in part 2: Selling a Service!

Part 1- Selling Things - Part 2- Selling a Service

Part 1- Work Harder - Part 2- Work Smarter - Part 3- Invest

This article is for my sister who asked me this very question:

“How can I make more money?“

There are three ways:

1) Work harder

2) Work smarter

3) Invest

Let’s go through them one at a time.

My sister currently works part time at a fast food restaurant while she studies.

She makes minimum wage, which is currently $8.00 an hour.

If she works part time, 20 hours per week, 52 weeks per year, as she is currently, she will make $8,320 per year.

Now, 8000 odd dollars is nothing to sneeze at, but the goal here is to make MORE money: what would happen if my sister decided to work full time? Certainly she’d make more money, but how much more?

If she works full time, 40 hours per week, 52 weeks a year, she will make $16,640 per year.

Not bad, but you’d have a hard time making a living on $16,000 (don’t forget, that’s BEFORE taxes!).

So what if my sister wanted to make even MORE money?

If she worked 60 hours a week, at $8 an hour, for 52 weeks, she would make $24,960 (before taxes).

At 80 hours, double what is considered full time employment, she would make $33,280.

Fun fact: if my sister were a robot, and could work every hour of every day, every week, all year for $8 dollars an hour (24×7x52×8$)

she would make $69,888!

This is physically impossible, and most probably illegal.

Why do I mention this unlikely scenario? Because I want to show you that, if your only strategy is to simply to work more, to work harder, to make more money, the most you could even hope to achieve at our minimum wage example is just short of $70,000.

And that’s only if you’re a robot.

Doesn’t really appeal though does it, simply working harder at cleaning toilets and feeding colicky chilren and adults alike for an annual sum of about $24,000 and 40 hours of your life per week.

Fear not, my sister could also utilize the next strategy on our list: she could work SMARTER.

To see how, let’s head on over to part 2!

Part 1- Work Harder - Part 2- Work Smarter - Part 3- Invest

Part 1- Work Harder - Part 2- Work Smarter - Part 3- Invest

Let’s say my sister gets a raise. Instead of making $8 an hour, she now makes 14$ an hour (which, at a fast food restaurant, this means she’s either a high level manager or she lives in Alberta…)

If she works part time, 20 hours a week for 52 weeks, earning $14 an hour, she would make $14,560. This is $6,240 more than she would have made if she were working for $8 an hour (before taxes, of course!)

If she worked 40 hours a week for 52 weeks, she would earn $29,120. This is $12,480 more than she would have made making $8 an hour, which is better, but still not great, especially once you factor in taxes.

If she worked 60 hours a week, at $14 an hour, for 52 weeks, she would earn $43,680. This is $18,720 more than if she had been working for $8 dollars an hour.

At 80 hours, double what is considered full time, she would earn $58,240 per year. This is $24,960 more than if she had been working for $8 an hour.

Fun fact: if my sister were a robot, and could work every hour of every day, every week, all year for $14 dollars an hour (24×7x52×14) she would make $122,304!

Again, impossible, likely illegal.

So clearly, one can make more money by simply earning a higher wage. This earning a higher wage is what I’m going to call working SMARTER. This is not a moral statement; it doesn’t mean that people who do not make a certain amount are not smart. Using the term “working smarter” simply refers to the fact that most jobs that offer higher wages are usually dependent on the type of skills or education a person has.

There are, therefore, two ways to work smarter by our definition: get educated or get qualified.

There is good news though; it’s not all about being a doctor or a lawyer anymore.

Remember your high school economis courses? The law of supply and demand is absolutely present in the labour market! Recall that as more of something is supplied, the less valuable it becomes.

Now when you think high income earners, what do you think of? Doctors and lawyers and dentists, no doubt.

As it turns out, in previous and current generations, everyone thought the same thing when they thought of high income earners! Doctors and lawyers and dentists (oh my!). There were so many people going into (or pushed towards) these traditionally high income professions while that nobody was going into the many old-school, decidedly non-sexy industries anymore. Think about it: do you know any parent who dreams about their child becoming a cook in a mining company? The fact is, now many industries are facing a great dearth of qualified people.

For example, in the coming years, as reported by Quebec based magazine L’actualite in their June 2008 issue, there will be a great demand for miners, IT workers, cooks, nurses, and others of the like within Quebec (though a quick search could probably reveal the same information for your area). For even more information on what kinds of employment will be in demand in the coming years, check out this page on L’actualite’s website (in french).

Here is another resource you can use if you wish to know more about what kinds of jobs are going to be needed and how much they will pay. The Career Management Services center at the John Molson School of Business at Concordia University in Montreal has data on pretty much any job you could think of in this PDF file. It’s a big file, but the information is extremly useful starting form page 15 on.

In the case of many industries, there are so few people going into these disciplines that the value for people with the skills required to fill these posts has shot waaay up in value (I have heard anecdotal reports of cooks in certain mining companies making 100k a year, though I am still trying to validate this; you could do your own research by exploring these industries and job postings though sites like monster.ca).

In my own personal case, it used to be that I could make minimum wage working at a store that sells computers, however, I quickly realized that if I became a CompTIA certified A+ computer technician, I could start making upwards of $12 an hour.

The trade off of course is that education and qualifications take time and usually a bit of money to get. But if you’ve got the maturity and the drive to forgo minimum wage now for potentially higher wages in the future, working SMARTER rather than working HARDER is probably the preferred way to make more money.

I chose finance, but who knows! There’s a whole world out there, what about aircraft mechanics? Microsoft certified technician? Food and drink manufacturing? The choices are vast and numerous.

But my sister has not yet found a professional passion, so her remaining choice to make more money is third on our list, though perhaps the most important. She must make sure that what money she does save is able to grow, and to do this, she must INVEST.

Onwards to part 3!

 Part 1- Work Harder - Part 2- Work Smarter - Part 3- Invest

Part 1- Work Harder - Part 2- Work Smarter - Part 3- Invest

(N.B: this section will be necessarily brief: a more through discussion on the merits of investing and compound interest will be provided shortly, in their own articles, as they are that important).

Actually, investing is a bit of a misnomer. What I really mean is that in order to make more money, my sister has to start accruing interest on her financial assets. In short, she has make her money start accruing interest.

If there’s a secret to wealth, it’s compound interest.

What’s compound interest? It’s free money (hey…that would be a great title for an article…).

I’ll explain.

Let’s say my sister works 20 hours a week for 8 dollars. That’s 160$/week.

Now lets say that my sister has wisely decided to save 10% of her weekly pay, in order to help make her money grow. 10% of $160 is $16, less than the price of two movie tickets.

Let’s say she decided to plunk this 16$ in a savings account that pays 3% interest on whatever money is in that account, every month (you won’t find this, by the way. You may find accounts that offer 3% a year, but our 3% per month example almost never happens in real life).

At the end of the month, she may be surprised to find that the balance in her savings account, which started with $16 dollars and accrues interest monthly at a rate of 3%, is now $16.48

She made $0.48, or 3% of her beginning investment, JUST BY DOING NOTHING.

That’s simple interest, ie: interest paid on the original principal amount of $16 dollars.

It gets better.

What if she reinvested the $16.48 for another month into that same savings account again at 3% interest?

At the end of the second month, my sister would have $16.97!

At the end of two months, she would have made almost a full dollar, just by virtue of letting her money compound for 2 months at 3%.

I bet she wouldn’t even miss that 16$ (would you?)!

Now, 3% is a fairly conservative rate; most of the time (in Canada) this will just barely outpace inflation (follow this link for some information you absolutely must have about inflation).

Fortunately, there are ways to earn higher returns. The nice thing about our savings account is that the 3% is guaranteed so long as you have money in the account to accrue interest.

The higher the return you want, the more risk you usually have to take.

For example, a money market account is usually a fairly safe investment, but only returns about 4% a year.

Bonds can be very safe or very risky depending on their type, and their rates will reflect the level of risk. For example, a Canadian Government Bond, which is usually considered low risk, may offer you 4 to 5% these days.

An indexed mutual fund may be more risky than bonds, but historically the stock market as a whole has returned an average of about 10% per year. It is important to understand that this 10% is an AVERAGE, some years will see lower, even negative, returns and some see much higher positive returns.

Individual stocks are the riskiest of all, but the returns are, potentially, unlimited. Unfortunately, so is their potential for disaster.

Conclusion

So there you have it!

You can make money by doing nothing but keeping an eye on your investments, something that may take just a few hours a month. And bonus! You can hire people to counsel you on your investments! So really you don’t have to do anything but earn the money you need to invest, which you have to do anyway.

Personally I think if you want to make more money, the best strategy is a combination of points 2) work smarter, and 3) invest.

In truth, both these things should be happening, with everyone, at all times (if possible).

In order to counter inflation, you must make some sort of return on your money, which you achieve by investing. And in order to have the money to invest you have to have income coming in.

So tell me, which would you rather do: work 20 extra hours a week, or as or would you rather sit back relax and turn your money into more money?

Part 1- Work Harder - Part 2- Work Smarter - Part 3- Invest