|Bruce Fingerhood "Save" Sign in antique store, Oakland Oregon.|
The sign above is a humorous example of an underlying truth about banking. The bank uses your money in order to lend it to other people. The bank charges them more than they are paying you (that's their profit), but they are paying you. So the bank is charging the other guy (or girl) enough intrest to pay themselves and you too.
In other words:
Sign: We cheat the other guy and pass the savings on to you!
In addition to checking accounts the banks offer savings accounts.
1. To keep money out of your checking so that you are less likely to spend it.
2. To have a place to add to your savings (set aside money) and build it up. Investment advisers say you should have 6-9 months’ income in your savings at any one time.
As an example:
A normal savings may be paying 0.15% for $5,000 while a CD may pay 5% for the same $5000 for committing to leave it in for 6 to 12 months. (of course that's when the economy is doing well, it could be closer to 1% or less too).
You may ask:
“I don’t want to lock away my money… what if an emergency comes up?”
“What if you have no emergency how much money will you lose after three years of waiting for an emergency?”
Some people use the emergency excuse for not putting money into a CD. For example they’ll say that if an emergency came up like car repairs, or doctors’ bills that they didn’t plan on or expect and they need the money they don’t want to have to pay the interest penalties for taking it out.
These are not good reasons, however, to stay out of CD’s unless the emergency you’re referring to is not unexpected.
If you’re actively looking for a house and expect to buy soon, or you have a relative who is sick and likely to need medical expenses paid then maybe you were wise to withhold from a CD.
Possible emergencies that you don’t even know about are not good reasons to avoid putting money into a CD. Leave some out for emergencies and put some in for interest. Leave out 40% and put in 60%.
~Thinking Beyond Today~
He only put $2,000 in of his own money and never touched it. Where did the $48,000 come from? Compounding.
Compounding is one of the most powerful forces in the world of finance.
~Exercise: Math Time~
Balance * Rate * Days in Statement Cycle / 365 = Monthly Interest
In order to calculate this we must know how to turn a percentage into a decimal figure. To do this simply take the decimal point and move it two spaces to the left. For example 10 % is the number 10.00. Then move the point to the left two spaces which is now 0.10.
~Example of Roberts IRA~
($2,000 X 0.10 X 30)÷365 = $16.44 Per Month
($2016.44 X 0.10 X 30)÷365 = $16.57
The Insider is a BIG fan of Dave Ramsey:
- Go read/listen/watch Dave Ramsey and he'll teach you how to do it right!
- Listen to The Dave Ramsey Show (HERE)
- Or by his most popular book: (HERE) The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness