Financial experts advise that retirees will need 80 to 100 % of their pre-retirement income to live comfortably. How can you start making smart investments in your future?
To understand how your investment can grow, you need to have a basic understanding of compounding interest and the Rule of 72. When you understand these factors, it’s easy to see why it pays to start saving early. Even small contributions add up over time.
Two acronyms to know are APR and APY. APR stands for Annual Percentage Rate. APY stands for Annual Percentage Yield. APY refers to compounding — how interest accrues on your investment — so that percentage will always be higher than the APR. When you compare investments, make sure you’re comparing APY to APY.
You can also get a quick estimate of your IRA’s earning power with the Rule of 72. Divide 72 by the interest percentage to calculate how long it will take compounding interest to double your original investment.
Finally, remember that if you’re saving for retirement – and everyone should be – your first move should be debt reduction. This frees up money for other moves you can make and lessens the amount of money you pay to others, instead of yourself, each month.
Whether your major debts are larger or smaller, think of the progress you could make by devoting thousands of dollars you pay to others to yourself. Say you direct $3,000 you would otherwise pay to creditors during a year into an investment account returning 6 percent. If you do this for 10 consecutive years, you’re looking at $47,287, not $30,000. That’s what compound interest – the best kind of interest – can do for you financially.
Over time, compounding makes the money you save work harder for you — and that’s what investing is all about.