by Joseph Andrews

Created on: March 04, 2010   Last Updated: March 23, 2011

Saving money brings three benefits to your life. Your money works on your behalf so you can work less. By putting funds away, you'll have more money when you truly need it. Finally, as you begin to save, it spreads like happiness throughout your life.

 #1:  Compounding Interest.

In the book Rich Dad Poor Dad, your money is described as a worker who shows up every day and makes money without you lifting a finger.  This is a powerful analogy for people who dream of passive income.  Every dollar saved continues to work for you even when you take days off to head to the beach or sleep in. 

How much money will your worker make?  That depends on exactly how you invest.  However, let’s assume that you invest $100 into an IRA and over the next 30 years you earn 10%.  There is a simple rule called the Rule of 72 which will help you understand compounding interest.

How does the Rule of 72 work?  It’s easy, really.  Take the interest rate you think you’re going to get (in this case 10%) and divide it into 72.  For some reason, 72 happens to be this mathematical, magical number which calculates compounding interest. 

In this example, 10 divided into 72 = 7.2.  Your money will double every 7.2 years.

So, (to make it easy we’ll eliminate the .2 so we can do this math quickly) you don’t really have $100.  In seven years it will be $200.  In 14 years it will be $400.  In 21 years you’ll have $800.  In 28 years (probably a little longer because we discarded the .2), you’ll have $1,600 from your original $100 investment.  Wow!  That’s the power of the Rule of 72.  Your finances will be much, much healthier if you invest early and pay attention to your investments enough to get a fairly high return.

#2:  More Money For More Important Items.

Most people have never heard the term “opportunity cost.”  They’re too busy buying whatever they wish for today.  However, learning to measure your opportunity cost is a key driver in getting money saved and keeping it there. 

Opportunity cost means comparing two different uses of money.  Let’s say that you are thinking about buying a $100 sweater vs. invest the money for 30 years.  Using the Rule of 72 above, you can do some quick, logical comparisons. 

Would you rather have a $100 sweater today or $1,600 30 years from now?   Completing that comparison is called “weighing your opportunity cost.”  If you buy the sweater, you’re giving up a $1,600 opportunity.  Sadly, most never complete this sort of logic.  Instead, they buy the sweater and have no idea why they’re never motivated to save.

#3:  As You Save More, You Want To Save More, Making You Rich.

Once you’ve invested in a mutual fund or savings account, you begin to watch it.  Like anything, once you actually try to invest you find that it’s easier than you thought.  You begin to track your investment.  It makes money.  This encourages you to invest more money and to grow your savings.  Success breeds confidence which creates more success. 

There are many benefits of getting money saved.  However, if you follow these three simple steps to get your finances moving, you’ll begin finding success with your money!

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