Mastering Your Money Part 3: The Magic of Compounding

Welcome back to the Mastering your Money series. Last week we debriefed the importance of budgeting and easy ways to create your own. This week, we are going to look at compounding interest and how important it is to start saving now. Let’s jump right in!


What is compounding interest?

All money that is put into a savings account of some sort will accrue interest over time. Interest is simply the money you are making in return for loaning the bank your money. In fact, the bank only keeps some of your money in reserve and uses the rest to make loans. The interest you receive is almost like a repayment for you allowing them to do so. What makes compounding interest so effective is that you are essentially gaining interest on your interest. Before we dive right into examples, let’s understand the math behind compounding interest.

The formula for compounding interest is simple and in financial terms is called finding the “Future Value” of money. The values in the formula are listed along with the formula below.

The easiest way to find the future value is to google a future value calculator and plug in your values. The more professional way is to plug your values into the formula and use a calculator to solve. The coolest way to do this is to use a graphing calculator. If you use your graphing calculator, use the TVM solver which is located under the Finance section of the APPS button. There you can plug in all these variables, hit APLHA solve on the category you want to solve and you’ve got yourself the ultimate financial cheat-sheet. Whichever you choose, all three are reliable sources to figure out how much your money will grow over time.


Compounding Interest in Action

Now that we understand the math behind compounding, let’s look at some examples. If I were to put $1,000 in an investment account today at an interest rate of 7.5%, I am essentially making $75 in the first year just for letting the bank hold my money. The following year at the same 7.5% interest rate, I am now gaining 7.5% interest on $1,075 and my new earnings are $1,155.63. These gains may appear to be minuscule now, but over the course of a lifetime it will make an astounding difference. Don’t believe me? At the same interest rate of 7.5% you would have made $25,904.84 over a 45-year period without even lifting a finger, but why stop there?

To take even further advantage of compounding interest, add more money to your initial investment and watch your money grow exponentially. Let’s graduate to the big leagues to get a really good idea. Let’s say I invest an initial $10,000 into an investment account at the same 7.5% interest rate for 45 years. This time I am going to make a commitment to save an additional $7,500 annually and put it into my account. Under these circumstances, I would make a whopping $2,231,435.48, allowing me to retire a millionaire. Not bad, huh?


Start Saving Now

You need to recognize the importance of saving your money now. The earlier you start, the more money you will have saved up by the time you want to retire. Unfortunately, so many people today do not have the funds to comfortably retire because of a lack of savings. Many of those wish they would have saved when they were younger and are paying the price now. Trust me, you do not want to be old, tired, and still working to survive. Make the commitment to save today, be disciplined, and your future self will be proud of your current self for taking the initiative.


That’s it for this week’s installment of the Mastering Your Money series. Next week we will discuss what stock is and how to invest in it. Thanks for tuning in, goodbye for now!




Mastering Your Money Part 2: Budgeting

Welcome back to the Mastering your Money series. Last week we began our journey by understanding how to control your spending. The next step in our journey is budgeting, which is understanding how to better organize your finances. Let’s jump right in!

Why make a budget?

Budgeting is the backbone of your personal finances. Think of budgeting like planning a large party. To throw the best party you need to ask yourself some crucial questions. What food will you eat at your party, will you have live music, where will you host the party, and how many people will you invite? After you answer these questions, you can better prepare for the expenditures. Much like planning a party, you need to recognize what you want to get out of life so you can better prepare for it. Just like that party you went to that was a letdown due to poor planning, you don’t want your financial health to end up the same.

Building your Budget7027596629_1b17209fa6_n

To successfully budget you need to determine your income, your necessary expenses, and leftover money you may want to save. I suggest you write all these things down on a piece of paper to organize your thoughts. First, determine your monthly and yearly income, which is essentially the limit of what you can afford. If you are a salaried employee, use your annual salary and divide that by 12 for your monthly income. If you are an hourly employee, multiply your hourly rate times the average hours you work a month for an estimated monthly income, and multiply that by 12 for your yearly income. These figures are your lifeblood, and you should NEVER spend more than either your monthly or annual rate.

Next you need to evaluate your expense and determine if you are spending your money wisely. If you find that you are spending more money than you make in a month or year, something needs to go! For example, many people have recently ditched cable television in their homes and are saving hundreds of dollars a month because of it. You may also need to monitor your spending more closely by allotting yourself a certain amount of money each month on entertainment, food, and shopping expenses. Whatever it may be, you know what is putting yourself over your limit, and you need to let it go.

Additionally, I would encourage you to save money. As a rule of thumb, I try and save 10% of all my monthly income to secure myself a steady stream of savings and investment funds (which we will talk about in more depth in the coming weeks). After all these things have been determined, you can now begin to build your budget.

How to Make a Budget

Below are two of the most effective ways to construct a budget. I currently use both methods to keep my budget, and I highly recommend you use at least one of these two methods.


The two best apps for creating budgets are Mint and YNAB (You Need a Budget), both of which are free and are found on the Apple and Android app stores. These apps allow you intuitto get a comprehensive view of how you spend your money, your cash flow levels, track bills, and more! All you need to do is link a bank account (don’t worry its safe, I know from experience) and you’re in business! I personally use Mint, and I love it because it automatically tracks my budget progress. With Excel, I had to manually update my budget every day which is tiring and cumbersome. And plus, I can log in and check my budget at anytime, anywhere. Using a trusted app like Mint or YNAB is certainly a budgeting win!



For those of you who would rather do things the old fashion way and manually keep up with your budgeting, excel is king. I recommend that everyone at least become familiar with Excel. Excel is a powerful tool that can be used to do all sorts of things from budgeting, to graphing, to financial projections, and I encourage you to learn how to use it. I still use Excel as a supplemental tool to track my budget over a longer period, which is something Mint can’t offer you.  Excel offers tons of free templates that will guide you through creating your budget. Most times, all you will have to do is put in your own values and you’ve got yourself a budget full of charts and all sorts of fun widgets. Again, I understand that Excel is much more time consuming, but I can tell you from experience as an Excel budgeter that its worth getting acquainted with it.


Pro Tip

I personally combine Mint and Excel to get the best of both worlds. I use Mint as a tool to keep up with my short-term budgeting (month to month) and Excel for my long-term budgeting (months and years). The automated reports of Mint allow me a better in depth look at my present financial health, while avoiding the hassle of tracking my own spending and logging it every day into Excel. But with Excel, I can make budget projections and track my finances in ways that are out of Mint’s “here and now” approach to budgeting. Combining the two allows you to get the most out of your budgeting, I HIGHLY RECOMMEND you take advantage of this powerful duo!



Congratulations on finishing another step in your journey to Mastering your Money. Next week we will explore the Magic of Compounding, your introduction on how to make money without even lifting a finger. For now, thanks again for stopping by, and I’ll see you next week! Remember, its time you stop letting money control you, its time you master your money.


Disclaimer for cover photo: CC image courtesy of  GotCredit on Flickr

Mastering Your Money Part 1: Controlling Your Spending

The first step in mastering your finances is having the ability to control your spending. Spending within itself is not evil, we need to spend money to buy food, clothing, pay for our house and car, and a wide variety of other necessary expenses. But like anything in life, there comes a point where too much of something is no longer a good thing. Many people will run up credit card debt, spending money they don’t have to buy things they truly don’t need. Still others will spend too much money on things that bring them happiness and forget to pay the bills. To break this bad habit of over-spending, let’s first look at where people are most prone to overspend.


How We Spend our Money


The United States is a consumer driven economy. Every year, consumers spend billions of dollars on a variety of goods and services to improve their lives and to increase their personal satisfaction. With a whooping total of 99%, the single biggest industry where college students spend their money is the restaurant industry. According to Forbes Magazine, students can spend up to $2,500 a year on restaurant and food related expenses alone. People with families are sure to see an even steeper increase in restaurant expenditures.



Consumers are also prone to overspend on entertainment. For example, I recently took a trip to Atlantic City with five friends to observe their spending habits. One open mic night at the bar later and each friend spent an average of $15 on drinks, and that was before the casino! Entertainment expenses can add up quick, visit you nearest movie theater and buy some food to go with your movie if you don’t believe me.


Without doubt the most dangerous temptation to overspend is the credit card. Being able to flash a shiny piece of plastic and buy anything you want with a swipe feels so satisfying, but ends so very poorly. USA Today reports that over the past ten years’ college students have become less likely to pay off credit card debt on time in addition to refusing to pay the entire bill and settling for the minimum payment. The interest rate on these cards, especially for young people, are incredibly high. The average APR for student credit is about 22% and for adults is around 20%, which means those outstanding balances are quickly building up high interest expenses. In the coming weeks I will do an article on how I have personally taken advantage of credit card companies to make money. But for now, if you can’t properly use it, lose it!


Curbing Your Spending

money lock

Now that we better understand what we are prone to overspend on, let’s come up with a strategy on how to eliminate our bad habit. The single most effective way to overcome your overspending habit is to cancel your credit card and carry cash. Behavioral economists Dun and Bradstreet conducted a study on credit card spending versus cash and found that people are likely to spend 12-18% more when using a credit card. In other words, that means that for every $100 you spend in cash, you are likely to have spent $118 with your credit card. The reasoning behind why people spend more with credit cards is that they do not feel the actual loss of money until a month after their purchase, while the loss is felt immediately when you use cash. I guarantee that you will find yourself more reluctant to splash the cash on things you did before once you feel those bills slipping through your fingers.

Another effective way to eliminate overspending is to seek other alternatives of entertainment that are more affordable. Why spend $12 on an overpriced mixed drink at the bar every Friday night when you can make your own at home with your friends for a fraction of the price? Why go to the movie theaters and buy popcorn, soda, and candy when you can rent a movie from Redbox or Netflix and buy the same food from the dollar store? When you think about it practically, it makes more economic sense to forego consistent weekend extravaganzas and hang out with friends enjoying the same things for less. Society will pressure you to get out every weekend and spend, spend, spend. They want you to think spending your money is necessary for your enjoyment, but be assured, you don’t have to.


Putting it all Together


I’m not saying that going out and enjoying yourself is wrong, what I’m saying is that you need to measure yourself. There is nothing wrong with saying that you will eat a home-cooked meal instead of going out, there is nothing wrong with watching a movie at home instead of the theaters, and there is nothing wrong with canceling that credit card. Ultimately, your own self-discipline and determination to control your spending is what makes the difference. I’ve brought up the problem, I’ve made some suggestions, now you come up with a definitive solution that meets your personal needs.


Now that we understand the biggest issues surrounding overspending, I believe that you are ready to level up. Next week we’ll learn how to efficiently allocate your financial resources through budgeting. I commend you on taking this first step to improve your financial health. Remember, its time you stop letting money control you, its time you master your money.

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