The 3 Money Magic Tricks
Capital One ShareBuilder recently released surprising findings from a study:
- 93 percent of Americans think they should save for retirement, half believe they should save 10 percent, but only one-fifth are saving 10 percent or more
- 75 percent are not sleeping because of financial concerns
- 34 percent are concerned about taking care of children and saving for college, only 13 percent are concerned with retirement
Additionally, a survey done by the Employee Benefit Research Institute found that 60 percent of American workers and 58 percent of American retirees have less than $25,000 in savings.
Americans are not saving enough for retirement and are putting anything and everything ahead of this inevitable stage of life. Whether this is the fault of instant gratification, America’s anti-savings policies or because retirement seems too far in the future to plan for today is up for debate. Regardless of the reason, Americans are postponing saving for retirement and missing out on the three money magic tricks of investing.
These money magic tricks include the time value of money, compounding interest and dollar cost averaging:
- Time Value of Money – Because of interest and inflation, money today is worth more than the same amount of money in the future. As Investopedia.com puts it, “any amount of money is worth more the sooner it is received.” Investors benefit more if they save more money early.
- Compounding Interest – This is the result of interest earning interest on itself. For example, $100 in an account earning 5% interest will be worth $105 at the end of one year. The next year interest is applied to the $105 and becomes $110.25, rather than $110. This also applies to dividend reinvestments into stocks, mutual funds and other investments. The more money and time an investor has, the more significant this effect.
- Dollar Cost Averaging – This is the concept of buying a fixed dollar amount of an investment regardless of the investment’s share price. Over time, the average cost of the investment will decrease because more shares are purchased when the price is low and fewer shares are purchased when the price is high. The benefit to investors is overall reduced investment expenses.
These magic tricks are the means to make money work for us, instead of us just working to make money. All of these magic tricks, however, require time and time is exactly what Americans are not giving themselves. The longer an investor waits to take advantage of these magic tricks, the less powerful they are.
The above findings suggest to us that Americans know it is important to save for retirement, but they are not doing so and this is part of the reason for their loss of sleep at night. Americans know they need to be more prudent with their hard earned money because they sense the risk in not doing so.
It is important to save as early as possible, save as much as possible and save as often as possible. We understand that these are tough economic times that make saving much more difficult, but times such as these demonstrate the importance of, getting out of debt, saving and investing. For example, those who are underemployed or unemployed, especially those who are long-term unemployed, would benefit from having more savings and investments today if for no other reason than having a higher sense of financial security.
The most significant finding to us is that more Americans are concerned with saving for their children’s college education than they are concerned with saving for their own retirement. To us, this is a bit like helping to put the oxygen mask on the person next to you in a plane before putting an oxygen mask on yourself. What is the good of putting a child through college if you wind up unable to take care of yourself and become their financial burden afterwards?
Americans are living longer and healthcare is becoming more expensive, especially prescription drugs. Americans dream of a retirement playing golf on beach-adjacent golf courses and traveling the world. Dreams of skiing the finest mountains in North America and spoiling grand children are common among retirees. These dreams are difficult to achieve, if not impossible, without proper time saving and investing.
All totaled, these findings suggest to us that Americans are putting off until tomorrow what they should be doing today. Lost time cannot be recouped. If you are a part of these statistics, make the changes you need to take advantage of the magic tricks of the time value of money, compounding interest and dollar cost averaging. They are three ways to help you sleep better at night.