How To Master Money So It Doesn’t Master You

Interest is relentless, whether it is about work for you or against you. You can ensure that the principles of compound interest are working for you. For instance, if you invest $1,000 each month, earning only 5% interest, you will accumulate a value of more than $830,000. On the other hand, if you borrow money at 5% and make monthly payments for 30 years, as with a mortgage, you can only borrow $186,000.

Most of us will be obliged to borrow money in order to buy a home. That is wise, notwithstanding the experiences of the past five years. Homes do tend to appreciate in value over long periods of time (though there are no guarantee). More importantly, home ownership is often help improve the stability of the home. That’s what you’re really about.

Most people choose to drive cars that require car loans. It isn’t, however, that hard to purchase a car in cash. A new car payment could easily reach $500. In just six months of saving that amount, you can buy a car that runs and will likely continue to run for several years with regular maintenance, but with no car payment and very little depreciation

If you save $400 each month for your next car (spending the extra $100 on maintenance) after two years you’ll have put $9,600 into savings on which you’ll have earned some interest, so you’ll likely have $10,000 of cash, plus a $1,000 clunker for a trade in. You’re not buying a clunker any more. Sure, you’ll be purchasing a used car, but likely one that you can drive with pride for five years or more. Along the way, you’ll keep saving and at the rate of $400 per month with a little interest, you’ll accumulate $25,000 of cash, plus your trade in so now you can get a new car if you want. Drive that for seven to ten years, and your next car will be one you’ll be pleased to be purchasing!

This same principle and pattern apply to almost anything. It applies to your vacations (OK, you can’t trade-in a used vacation), a new set of golf clubs for your husband, a new bicycle for you—just about anything that threatens to stretch your spending budget. The impact of savings for smaller purchases can be even greater than for your car because the interest you are paid to credit cards—the way you borrow money for bicycles and golf clubs—is a lot higher than the interest rate on a typical car loan.

Plenty of people let their consumer debt accumulate until it looks like a car loan and all they have to show for it is used stuff that would be difficult to sell at a garage sale and some photos from vacation. You can take control of money by saving for things you make up for instead of using credit cards and loans. If you do, you’ll find that money works for you and makes your life easier, not harder. You’ll be investing in stocks, bonds and real estate and planning for a wonderful retirement while your friends hold garage sales.