Pay Yourself First
Everyone knows it is a good idea to save money for
the future. However, in real life, it is much easier
to spend money than save it. People who are successful
at saving money for the future follow this rule: Pay
yourself first.
Does it sound selfish and greedy to pay yourself
first? Well, it's not!
- Paying yourself first
means that when you earn or receive money and you
are planning how to spend it, you promise yourself
to put a certain amount of money in savings first.
- Some young people find that saving 10% of their
income is a good way to get started.
It takes discipline to pay yourself first. Sometimes
you will have to make hard choices about what is most
important to you. There are opportunity costs
to consider.
Making the Right Choice
A good example of an opportunity cost is
deciding to stay home and do your homework or study
for a test instead of going out with your friends
on Sunday afternoon. Because you have a more important
goal — doing well in school — you give up
the opportunity to do something fun on Sunday. That
is your opportunity cost for staying home to study.
Making the decision to save money for an emergency
fund or to go to university will probably mean you
have to give up some things you want once in a while.
But it is a mark of maturity when you are able to
make sensible financial decisions and choices for
the sake of your future.
Why Start Now?
Why is it important to start saving money when you
are young? Couldn't you wait until you're older?
Like many young people, you probably have dreams
of someday having your own car, getting an education,
buying a home, or starting your own business. In order
to reach these goals, it will take money. That's why
you need to start saving toward your goals now.
Putting Your Money to Work
When you put money into a savings account, your money
works for you by earning interest 24 hours a day.
The younger you are when you start saving, the longer
your money has to grow. There are two types of interest
money can earn — simple interest or compound
interest.
- Simple interest
is a flat rate of interest that is paid on the amount
you deposit into your account (the principle).
- Compound interest allows you to earn
interest on the principle you deposit in the account,
plus interest on the interest you earn by leaving
your money in the account.
Which Type of Interest Is Best?
Most banks and building societies pay compound interest
on savings accounts. Compound interest can be a very
powerful factor in increasing your financial wealth
over a period of time.
The principle of compounding causes your money to
grow faster and faster as the years go by. Even a
very small amount of money — such as the £3
to £5 per week you put in vending machines —
can build a huge "nest egg."
Use this free compound interest calculator to see
how fast your money can multiply once you start paying
yourself first. Go to The
Motley Fool website (fool.co.uk).
Then put in the numbers and the calculator will tell
you how much money could have five or ten years from
now.
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