Getting ahead is the American Dream. All of us work harder and harder for that very goal. For some the goal is short term, say, to take an exotic vacation. For others it is the long term goal of a comfortable retirement or their children’s education. Whatever your financial goals are, the key to attaining them is to continually moving forward. That is the very essence of how to get ahead.
The very first thing that is required for getting ahead is financial intelligence. Like with everything else, knowledge is power. It is said that Albert Einstein can be quoted as saying that man’s greatest invention is compound interest. Many people don’t even know what compound interest is. Compound interest is when interest is added to the principal of a deposit or loan, so that from that moment on, the interest that has been added also earns interest. This addition of interest to principal is called compounding. Compound interest works in both directions. If you have a credit card and only pay the monthly minimum, the interest charged by the bank on your outstanding balance becomes the new outstanding balance, and you are then charged interest on that number. That is why it can take years and years to pay off a balance and end up paying an amount in interest potentially greater to that what you initially spent. In that case your bank is the big winner, not you.
On the other hand, compound interest on your savings is the most powerful tool that consumers have to get ahead. If you had $1,000 in savings, and could save another $100 every month, (assuming a 5% compound interest rate) after 20 years you would have $42,332.44. You would have paid $25,000 in principal and made $17,332.44 in compound interest. That’s money the bank paid you. That equates to an approximate return of 70% over the 20 years.
Look at your debts – credit cards, mortgages, student loans, etc., – you are paying compound interest on all of them. Now look at your savings. Are you even making enough in compound interest on savings to offset what you are paying in loans? For most of us the answer is no. And that is where we need to get smart. As consumers we all need to look at our own financial situation and do the math. Then we will start to be financially intelligent. You don’t have to be a genius, it’s just simple math to get the facts.
From the facts you build a plan to where you accelerate the payment of your loans and therefore lower the amount of compound interest working against you, and use those savings to increase the amount of compound interest working for you. It may take a while until you catch up but that’s o.k., at least you’re on your way. And once you’re on your way, you’ll eventually find yourself getting ahead and moving toward the American Dream.