Everything Personal Finance for the 20s and 30s: Erase your Debt, Personalize Your Budget, and Plan Now to Secure Your Future

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Overview

Are you among the millions of young Americans overwhelmed with outstanding debt? If you are sick of hearing about saving and investing for the long term and can't figure out how to pay this month's bills on time, The Everything® Personal Finance Book in Your 20s & 30s Book is the one guide that can get you back on track.

Specifically geared toward people who want complete financial independence, this step-by-step book helps makes it so that you no longer have to borrow from ...

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Overview

Are you among the millions of young Americans overwhelmed with outstanding debt? If you are sick of hearing about saving and investing for the long term and can't figure out how to pay this month's bills on time, The Everything® Personal Finance Book in Your 20s & 30s Book is the one guide that can get you back on track.

Specifically geared toward people who want complete financial independence, this step-by-step book helps makes it so that you no longer have to borrow from family and friends and live from paycheck to paycheck. From paying off personal debt and student loans to planning for major items such as a home or a new car, this savvy book shows even the most inexperienced financial planner how to manage, save, and invest wisely.

The Everything® Personal Finance Book in Your 20s & 30s Book helps you: *Budget-guilt-free!
*Build an emergency money fund
*Recover from credit card debt
*Splurge smartly on luxury items
*Pay off student loans

Packed with up-to-date information on current financial trends, The Everything® Personal Finance Book in Your 20s & 30s Book is the one book you need to secure your financial future!

Debby Fowles holds a B.S. degree in management and has more than twenty years of accounting and business experience. Ms. Fowles has written several articles as the About.com Guide for Financial Planning since May of 1999. She lives in Georgetown, ME.

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Product Details

  • ISBN-13: 9781580629706
  • Publisher: Adams Media Corporation
  • Publication date: 10/28/2003
  • Series: Everything Series
  • Edition description: Older Edition
  • Pages: 304
  • Product dimensions: 8.10 (w) x 9.28 (h) x 0.94 (d)

Read an Excerpt

Chapter 4

The Secret to Saving Money

Without a savings plan, the chances of saving enough money to meet long-term financial goals are very slim. Like financial success, saving money doesn't happen by accident. It requires smart buying, cutting costs, planning, and understanding a few basic financial concepts like the magic of compounding, the Rule of 72, the time value of money, and the danger of inflation.

The Magic of Compounding

The magic of compounding is the biggest reason that it's so important to start saving in your early 20s. People who wait until their 40s to start saving will have to save much more than those who started in their 20s. What's worse is that they will never be able to catch up with those who started in their 20s without saving and investing drastically higher amounts than would have been necessary had they started at a younger age.

Methods of Compounding

There are two basic methods of calculating interest: simple interest and compound interest. Simple interest is calculated based only on your initial investment. Compounding means that you earn interest on your interest as well as on your initial investment. The difference may not seem like much, but the effect that compounding can have over a long period of time is astounding, especially with larger initial investments and higher rates of return. To illustrate how compounding works, assume you invest $1,000 at 10% interest compounded annually. At the end of year one you'll have earned $100, for a total of $1,100. At the end of year two, the interest is calculated on $1,100, so you'll earn $110, for a balance of $1,210.

Frequency of Compounding

Interest is usually compounded annually, monthly, or daily. The more frequently compounding takes place, the faster your money will grow. As the balance grows larger, the difference between simple interest and compound interest becomes greater. Let's say you put $5,000 in an account that earns 10% interest. Here's what your investment would be worth at the end of ten years if you didn't add another penny to it:
Compounded annually: $12,968
Compounded monthly: $13,535
Compounded daily: $13,589

To illustrate the effect of a longer period of time on compounding, consider Bill, who contributed $2,000 at 6% interest to an IRA beginning at the age of twenty-two and continued doing so each year until he was thirty (nine years). By the time he was sixty-five his $18,000 investment had grown to over $579,000. His friend Jim made a $2,000 contribution every year for thirty-five years, for a total of $70,000, but because he started at the age of thirty-one, his nest egg only totaled $470,000. Even though he contributed much more than Bill ($70,000 versus Bill's $18,000) he ended up with 23% less money.

The Rule of 72

The rule of 72 is a nifty mathematical computation used to estimate how long it will take a certain sum of money to double at a certain interest rate. You can use this simple rule to quickly determine how long it will take your savings or an investment to double, or how long it will take a debt to double. Try it out on some of your investments or debts.

Calculating How Quickly Your Money Will Double

The calculation is simple: divide 72 by the interest rate or expected rate of return. The result is the number of years it will take your money to double at that interest rate assuming you reinvest your earnings. As an example, you have $10,000 and you want to know how long it will take to double that amount if it earns 8% interest: 72 divided by 8 = 9, so it will take nine years. You can also use the Rule of 72 to estimate what rate of return you'd need to earn in order for your money to double in a certain number of years, for example, ten years: 72 divided by 10 = 7.2, so you'd need to earn 7.2% annually for your money to double in ten years.

How Many Times Will Your Money Double?

The power of the Rule of 72 doesn't stop there. It illustrates how important differences in interest rates are, because the lower the interest rate the longer it takes to double your money, and the real key to growing your money is to double it as many times as possible. Look at this example of $100 doubling eight times:

$100
$200
$400
$800
$1,600
$3,200
$6,400
$12,800
$25,600

As you can see, the real growth comes after the money has doubled several times, which is important when you're saving or investing for long-term goals like retirement. By using the Rule of 72, you can calculate how much you'll have by a certain time and you can compare the long-term effects of interest rates on various investments that you own.

Double Savings, But Don't Double Debt

You can use the Rule of 72 to see how long it will take your credit card or other debt to double, too. If you have a $5,000 credit card balance with an interest rate of 10%, your debt will double in 7.2 years. If the interest rate is 19%, your debt will double in only 3.8 years. You can see why it's so hard to pay off your credit card debt, especially if the interest rate is high. If you're only paying the minimum payment each month, it doesn't take long for your balance to double.

The Danger of Inflation

Inflation is the effect of rising prices on your buying power. Inflation is often left out of the equation when calculating how much money you'll have available at some point down the road, but inflation can make serious inroads into the buying power of your money. The average inflation rate since 1994 has been approximately 2.5%, but in the early 1980s, we experienced double-digit inflation. Since 1980, the price of goods and services has increased 80%, so an item that cost $100 in 1980 costs $180 in 2002. Since much of our financial planning is done for years into the future, it's important to consider the impact of inflation when determining how much money you'll need in retirement, for example.
You can use the Rule of 72 to estimate the real buying power of a sum of money at some point in the future, taking inflation into consideration. If the inflation rate is 4%, prices will double in eighteen years (72 divided by 4 = 18), so if you plan to retire in eighteen years, and you need $3,000 a month in today's money, you'd need $6,000 a month to retain the same buying power you have today.

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Table of Contents

Introduction
1. Setting Goals: Your Financial Road Map
2. Banking Basics
3. Guilt-free Budgeting
4. The Secret to Saving Money
5. Credit Cards: The Good, the Bad, and the Ugly
6. Digging Out of Credit Card Debt
7. Student Loans
8. Show Me the Money: Work and Career
9. Moving On: The Cost of Relocating to a New Neighborhood or Town
10. Buying Your Dream Home Without Becoming House Poor
11. Getting a Deal on Wheels: Cars and Trucks
12. So Happy Together: Marriage and Family
13. Unwed But Not Unwise: Financial Issues for Unmarried Couples
14. The Basics of Income Taxes and How to Keep More of Your Money
15. Investing: It Doesn't Have to Be a Gamble
16. Other Credit Issues
17. Retirement: Live for Today but Plan for Tomorrow
18. Insurance: Buying Security
19. Estate Planning: Where There's a Will, There's a Way
20. Do You Need Help? Using a Financial Planner
Appendix A: Top Financial Tips
Appendix B: Resources
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  • Anonymous

    Posted May 27, 2005

    Great Starter Book

    I am a big big Suze Orman fan however I needed to definetly learn the basics of money and budgeting. This book is a great beginner guide book with great resources that point you in the right direction to getting more information. Easy to read, not confusing, touches on different areas from your first apartment to estate planning etc. but dosen't confuse you with too much extra information that you may not be ready to take in being that there a million different finance topics you may have questions about. Great book!!

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