12 May, 2012

How To Accumulate Money

Accumulating Money
To have wealth, in the financial sense, we have to accumulate money. A pretty obvious statement but how many of us actually try to accumulate money? Probably very few. And if we do, have we a set proper plan?

The secret of accumulating money is to do so on a regular basis, no matter what our income may be. By saving money every month, and investing it wisely, we can all build a financial base. The compounding effect of money invested can be quite awesome if we leave it alone, other than to ensure that we are getting the best interest rate possible.

If we look at an example. If £100 is invested (or $100) every month at 12 per cent, for thirty years, the investment will be worth £/$308,097. In 50 years it will total more than £/$3 million. This is purely an illustration showing how money compounding over a period of time can build a sizeable sum.

To some people saving £100 a month would be no problem. They could probably save much more. To others £100 is a huge sum to save, a few pounds may be all that is possible.

No matter what your current situation it is possible to accumulate money. The following is a simple plan that has worked for many people.

The Money Accumulation Plan

Decide what you can afford to save out of your income every week or month. This has to be money that you will not touch, so the figure has to be realistic and is completely dependent on your own circumstances. It may be only a few pounds, or something much more substantial. What is essential is that the figure is achievable each week or month starting right now.

The next step is to work out the amount that you are going to save as a percentage of your current income. This is your starting point and will be different for everyone.

As a simple example: If your income is £800 per month and you can save £35 your starting percentage would be 4.37%.

This is your starting percentage. You need to make a pact with yourself that from now on, if we take the example, you will save a minimum of 4.37% of all your future income. This percentage is an individual thing. There is no right or wrong figure, it could be 2% or 20%. This doesn’t matter. It is the principle that is important i.e. to save a regular percentage amount from now on.

As you will no doubt realise we have gone one step better than the original illustration of someone saving £100 per month indefinitely. What we are doing is saving a fluctuating amount. As our situation improves, and our income increases, we will be saving a larger sum and so will accumulate money much more quickly.

Our starting percentage is a minimum figure. If we are doing well in the future the percentage can be increased, but at no time should it be reduced below the figure that you have agreed with yourself. This is why it is worth taking time and putting some thought into the initial amount that you are going to save.

The percentage figure is applicable to all money that you earn, or comes to you, from whatever source. If you get a windfall from a prize draw, or are left some money in a will, then still a minimum of 4.37%, in the case of our example, should be saved - no matter what you intend to do with the remainder.

Your savings used to accumulate money should be untouchable. Put other money aside, if possible, for emergencies but don’t touch this ‘special accumulating’ money.

No matter what sum you start off with it must be made to earn as much interest as possible. Don’t leave it under the mattress! Lock it away in a Bank Savings Account, Building Society, Investment Scheme or whatever you think is most appropriate. It must, however, keep earning compound interest.

You should remain continuously aware of the rate of interest that your money is making and switch funds about if necessary. Even an extra half percent can make a big difference long term. It doesn’t matter if you only have a small amount initially, treat it like it was several million. Get into the habit of expecting the highest return on your money. Read the financial pages, get to know something about simple investments. One day soon, when you are wealthy, this will be useful information.

The amount of money that you will be able to accumulate is based on three things:

1. The amount you save / invest each month.
2. The percentage rate at which your money is invested.
3. The length of time that you allow your money to compound.

These three things can help you accumulate money. But no matter what your ultimate aim, as with all things in life, actually starting and carrying out some sort of plan is what really matters.

Good luck.

Rule of 72.
To find out how quickly any money invested will double simply divide 72 by the rate of interest.

If your money is invested at 12% it will double in 6 years (72 divided by 12)
If your money is invested at 7% it will double in 10.28 years (72 divided by7)

This is providing you leave the money undisturbed at compound rates.

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1 comment:

  1. This advice echoes what my dad used to tell us...