Whether it is working for you or against you, interest is relentless. You can make sure that the principles of compound interest are working for you. For instance, if you invest $1,000 each month for 30 years, earning only 5 percent interest, you will accumulate a value of more than $830,000. On the other hand, if you borrow money at 5 percent and make monthly payments for 30 years, as with a mortgage, you can only borrow $186,000 today.
Most of us will be required to borrow money in order to buy a home. There's nothing wrong with doing so, notwithstanding the economic downturn of the past five years. For the most part, homes do tend to appreciate in value over long periods of time (though there is no guarantee). More importantly, home ownership tends to help improve the stability of the home and family.
Additionally, most people choose to drive cars that require car loans. It isn’t, however, that hard to buy a car for cash. A new car payment could easily reach $500 a month. 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 then 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 buying a used car, but likely one that you can drive with pride for five years or more.
While you drive that car for the next five years, you’ll keep saving and at the rate of $400 per month with a little interest, you’ll accumulate about $25,000 of cash, plus, you'll have your trade-in, so now you you'll be able to buy a new car if you want. Drive that for seven to ten years, and if you keep saving, your next car will be one you’ll be excited to buy!
This same principal and pattern applies to almost anything. It applies to your vacations (OK, you can’t trade in a used vacation), a new set of golf clubs, a new bicycle — just about anything that threatens to stretch your spending budget. The impact of saving for smaller purchases can be even greater than saving for your car because the interest you pay on 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 hard to sell at a garage sale. You can take control of money by saving for things you want to buy 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 are all holding garage sales.
Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.