Compound Interest is a powerful thing. Albert Einstein wrote about compounding being the most powerful force in the universe. Benjamin Franklin espoused the virtues of compound interest as the best way he new to become wealthy. People use it every day to their advantage, and you should too.
Hey I know CashArtBlog is a site for creative people, not those looking for a degree in compound interest. Just like with your Art though, if you have a good handle on the basics, the rest of your art is so much better. The same is true with your finances.
As an artist, I don’t see myself ever retiring from creating art in one form or another. They’re going to have to peel that brush out of my hand. You might feel the same way. I feel even though I always want to create, I will be more in control of how and what I am able to do if I am able to save up a nice nest egg using compound interest for later on in life. Whatever dollars you and I can tuck away now, if we are smart about it, can work for us as we go out and create our body of work.
I have met way too many artists, sign makers, and people in general, who maybe very talented, but don’t know jack about finances. Some do, but too many focus on the art side, and leave their finances to chance. This probably isn’t you, but it doesn’t hurt to get back to the financial basics from time to time. Take a few minutes to gain a little financial savvy, start using it to your advantage, and then go back and create your next masterpiece.
What is Compound Interest and How does it work?
That virtue regarding wealth that Benjamin Franklin talked about is compound interest. Compound interest is simply earning additional interest on your interest. Once you earn that first dollar in interest, that dollar is added to your principal. You then set the wheels in motion to allow your money to grow even more over time, at an ever increasing rate.
I will always remember my late Uncle Vic. He grew up poor during the great depression. In his lifetime he worked for the post office, he was a cop, and he was a business owner. I lived with him and my Aunt Audrey for two years while I went to college. One day he and I were talking in the kitchen and he strongly stated “You can’t make any money paying interest to other people! You have to get other people to pay interest to you!” I also remember he had his house paid off in three years, paid cash for almost everything, and had built up a very nice nest egg for himself.
What has the potential to pay you compound interest:
Money Market accounts
Certificates of Deposits
Stocks that pay dividends
Exchange Traded Funds (ETF)
You don’t have to be rich to start saving in a savings account or a money market account. Start where you can and go from there. Get somebody to pay you interest for change. At the time of this writing, interest rates are quite low. But things do move in cycles, and rates will go up eventually. Once you start earning a little interest, don’t scoff if it’s just a few bucks. Let compounding begin to work for you. Check out the table below.
Compound Interest-The Value of $10,000 Invested In a Lump Sum
10 Years $14,802 $21,589
20 Years $21,911 $46,610
30 Years $32,434 $100,627
40 Years $48,010 $217,245
The table above is just showing a one-time deposit of $10,000, with no additional deposits, and no taxes taken out. Just think if you were to add some bounty as you went along…Now you would really be getting somewhere. You can also check out the rule of 72 here.
Three things determine how fast and how much your money compounds: The interest rate, the length of time you leave your money alone to compound, and the tax rate.
Interest rate – Interest rates change over time. To get a better rate of return, you will have to take on more risk. The amount of risk you take on will depend upon your risk tolerance, your age, and the savings/investment instruments you choose.
Time – The more time you have to let your money grow, the better, and the more risk you can potentially take on.
Tax Rates – Tax rates change and the government’s gonna get a piece of your pie, one way or another. You have two choices: Pay taxes as you go, (non-qualified), or have your money grow tax deferred, (qualified) in an IRA, or a Roth IRA, or the like. With an IRA, you get a tax deduction for the amount of money you put in your IRA each year (up to a certain amount.) With a Roth IRA, you do not get a tax deduction, but your money grows tax deferred and you pay no taxes when you take the money out. These rules seem to change almost every year, and with the government so strapped for money, who knows what changes are ahead, but for now I have a Roth IRA, and I like it.
The bottom line is that it’s not easy to save unless you make it a priority. Even then, life has it’s way of letting you know who’s boss. The important thing is to start where and how you can, and grow from there. If you can stay in that mode, in time compound interest will start to work for you. By then you will have two portfolios – Your art portfolio, and your financial portfolio.
I am no Mark Twain, and I am no licensed financial guy. (Although I once was, in another life). But you gotta start somewhere, and in my humble opinion, the basics are the best place to start. If are young or are at a place where you are just getting started in the savings/investment game, I think a good credit union is a good place to start. At a credit union, you are a member, not an ATM machine like at most banks. Once you have a savings account built up to a level you feel is right for you, think about investing, or reducing debt.
If you already have some savings and are looking to invest, ask around if there might be a experienced, trustworthy, financial professional in your area that you can consult with. Don’t give them any money to start with, just check them out. Ask them about Exchange Traded Funds. The expenses are less than most mutual funds, there are many to choose from, and you can manage them in your own online account, if you want to.
The most important thing is to get started and get your money and compound interest to work for you….OK, I know that’s enough money talk for now. Go go draw, paint, sculpt, write, take photos, read, etc., I need to get back in the studio too!
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In the meantime, think how you can use compound interest to your advantage.