I don?t know about you, but I like to get myself a little present every year. What usually happens is that I pick up something I wouldn?t normally splurge on during the year to treat myself for Christmas.
And it feels great… until after the holidays.
This is because, just like most presents we receive from others, the value of the gift diminishes once the holidays have past, and the little gift becomes just one more piece of everyday stuff.
But last Christmas I did something different. Instead of spending my money on stuff that just turns into more junk, I opened an impact investing account for myself. This year? It’s definitely not junk and it’s still growing.
What if you could give yourself a gift that actually increases in value?
Setting up an account withSwell Investing requires about the same amount of skill as it does to set up an email account. It’s super easy to set up and fund, and really fun to pick your investments. (I took screenshots when I set up my account last year.Check it out.)
No guilt for splurging on yourself!
You don?t have to feel guilty about giving yourself a gift this Christmas, because Swell investments are impact investments that are poised to do good. So, not only are you growing your own gift, you are growing your gift to the planet and its people as well.
The word interest is …interesting. There are two definitions:
State of wanting to know or learn about something or someone.
?He looked around with interest?
Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt. “He’s paying 17% interest on his loan.”
If you really think about it, these definitions are more connected that they seem. Why? Because the way we use our money is an expression of who we are.? It is true that what we appreciate, appreciates. Spending time with our kids, putting in the hours to grow a business or volunteering at our favorite charity amplifies all of those aspects of our lives.? And guess what? The interest we give to banks has similar power.
How Banks Use Your Interest
When you place your money in a bank account, it doesn?t just sit there. The bank uses your money by lending it out to others. They make money from lending out YOUR money. And you may not always like where they put it. Some banks invest in things like private prisons and fossil fuels, or engage in shady business practices that hurt customers or communities. ?By the way, the same goes for the interest you pay on your loans.
So… How Much Money are we Talking About?
How big is the impact of your financial interest on the world? In 2017:
Global companies borrowed more than?$3.74 trillion dollars?to expand their businesses. Where do banks get the money they lend out to companies? You guessed it: from your deposits.
U.S. household debt reached $13 trillion dollars. The banks make money from the interest you pay on your loans, mortgage and credit cards. The average U.S. household paid almost $1,000 of interest just on their credit card balances.
Use Your Money To Express Your Deepest Self
Think about where you put your interest. Money has power. It is a mirror of who you are. It is an instrument that can help you evolve your own view of the world.?When you align your financial life with what you stand for, you will feel truly prosperous.
Start Small for Big Impact
This doesn’t need to be a huge overhaul. You can take small steps toward lining up your existing money (cash, loans, credit cards and investments) with institutions that share your evolving worldview.
No matter how much money you have, you have power to express your deepest self by the way that your money moves in the world.?Take your first step.?Check out these resources:
There are two powerful forces that are as essential to finance as gravity is to the universe:
The idea of time is straightforward, but compound interest can be confusing to people who are new to the world of finance and money. Understanding compound interest can exponentially increase the amount of money you earn in the bank, and who doesn?t want that? Let me help you wrap your head around how it works so that you can reap the benefits of compound interest and time.
Two Quick Definitions
If you?re really new, here are a few terms to understand. If you know them, then you can skip to the next header.
The principle is how much money you initially throw in the bank. If I go deposit $5,000, then my principle is $5,000.
Interest is how much money you earn from your principle. Interest is always written as a percentage. That percentage is how much more money I get at the end of a certain amount of time from having my principle sit in the bank. For example, if I earn 10% interest per year on my $5,000, then I get another $500 at the end of the year.
So far, we?ve put $5,000 in the bank and earned $500 in interest, because the interest rate is 10% of the $5,000 we put in. Now we have $5,500 in the bank and all we did was drive to the bank a year ago. That sounds great, so what?s the big deal about compound interest?
Compound interest is interest that you earn on your interest. Let?s keep all the same numbers. You put $5,000 in the bank, earn 10% interest, and after a year you have $5,500 in the bank. If you save that money for one more year with a compound interest rate of 10%, you?ll get 10% on your initial $5,000 PLUS 10% on your $500 interest earnings. That?s another $500 from your principle and an extra $50 from your interest.
I can already see the comments saying ?That?s it? The 8th wonder of the world is worth 50 bucks?? After one year, yeah, it?s only $50. But after 40 years, you?ll have $226,296.28 without touching your money once.
That means if you?re 25 and you put $5,000 in the bank, you don’t put in a penny more, and that money grows at 10% compound interest, you?ll have $226,296.28 waiting for you in your retirement account at 65.
If you?re 20 and you wait until you?re 65, you?ll have $364,452.42. Compound interest?s real value comes with time.
Compound Interest?s Best Friend: Time
Here?s how we jumped from $5,000 to over $200,000. After one year at 10% interest, you get your $5,500. Another year goes by and you earn another $500 from your principle and $50 on that interest.
One more year goes by, and you not only earn $500 from the 10% on your principle, but you also earn $55 from the 10% of your principle interest and 10% of the $50 in interest you earned the year before. Every year, your interest compounds itself and grows year after year. There?s a great online calculator that does all of this for you. So now you?re probably wondering?
How does this work in real life?
A 10% interest rate is great for calculating easy numbers for an article I?ll spend 90 minutes writing, but a real bank will only give you a compound interest rate between 0.1-1.05% per year.?To get the high earnings over time, you have to add money to your account every month. When you do that, both your interest payments and your principle increase. Just adding 10% of your check to your account?every month can have a huge impact on your savings in the future.
Let?s say you get the low end of the stick and get a .1% compound interest rate. If you put $5,000 in the bank and put $300 in that account every month for 40 years, You?ll end up with $152,047.85 in the bank just in time for your retirement account to open. Start earlier and wait 45 years, and you?ll have $170,845.65. That?s almost $19,000 more than the other guy who started saving just five years later.
But you don’t have to settle for 0.1-1.05% in a savings or checking account. You can earn a lot more if you start investing. Investing carries more risk (the value could go up or down in any given year) but your returns could be a lot higher. On average, the S&P 500 has returned 7% since its inception in 1928. The S&P 500 is a broad market index that gives you a high level picture of how the stock market is doing.
The next time you think about buying that $70 hoodie, think about what $70 would be worth in 40 years. At 10% annual interest rate, it’s?$3,168.
In this article, I assumed that you have a retirement account that you?re putting money into and I made it sound like giving up 10% of your monthly check is easy. I know that neither of those things are true for everyone. What you should take away from this anyway is:
Small savings over time can make a big impact
Time is your friend
Young people have one advantage our parents and grandparents don?t have: time. If you start saving early, you will thank yourself when you reach retirement and have that extra cash waiting for you.
Open a separate savings account and checking account. These accounts are low risk since the interest is pretty much guaranteed. But the interest is low. Even the ones that advertise “high interest” are only high when compared to other savings and checking accounts. Open a separate account anyway. Getting 1% on checking will help your money counteract inflation and gives you a separate bucket of money that you can grow over time (instead of spending it).
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Thinking about money gives me heart palpitations. As a small business owner in a creative field, my focus has always been squarely on my work and my clients. I send invoices off at lightening speed so I can get back to the real work.
Small business owners, freelancers, gig economy worker bees: we have all purchased tickets to ride a financial roller coaster. Money comes and goes in unpredictable waves. It?s easy to think things will always be sunny when you?re riding high on cash flow. But I?ve had enough down cycles over the past 15 years to know I can?t get comfortable.
The elephant in the room for me is retirement. For years I reinvested profits into the business, figuring I could save for retirement at some future date. When my industry, along with every other, took a nosedive in 2008, I was forced to dip into my savings. Fast forward 9 years and I?ve managed to make the business profitable again, purchase a nice apartment and maintain a comfortable standard of living.
But I have saved little for retirement.
Looking back, I wish I’d set up an automatic withdrawal and investment account, even if the contributions would’ve been small. Compound interest would have been nice.
“Compound interest is the eight wonder of the world. He who understands it, earns it…..he who doesn’t….pays it. Compound interest is the most powerful force in the universe.” -Albert Einstein
… Means Playing Catch-up For Retirement
I am now having to play catch up and it doesn’t look pretty. A peek at a retirement calculator confirmed my fears.??The good news is, I’m putting my retirement decisions on a fast track.?A few years ago I opened an IRA account and because I cannot contribute more than $5,500 per year, I decided to invest aggressively by purchasing mostly technology stocks. So far that account is up a whopping 30%. It isn’t a lot of money and that’s the only reason I feel safe taking such a risk.
Next, I opened a SEP account through my business (something I should have done ages ago) and opted for a more balanced portfolio made up of low cost?ETFs. I am contributing the maximum allowable each year, which in my case is about $20,000. These are pre-tax dollars and I am counting on that compounding interest to help reach my retirement goals.?This plan has certainly curtailed my bottom line, which means I’ve had to cut back on my expensive sushi and sake habit. But I feel safer knowing the money is working for me.
When You’re Building A Business, It’s Hard To Save
When you’re busy building a business from the grown up retirement is the last thing on your mind. As free agents it is hard enough to keep track of all the tax liabilities, let alone a retirement account. It seems almost trivial. But time flies when you’re having fun and before you know it, your friend who’s been doing the corporate grind for 15 years suddenly has a nice nest egg and you have…..nothing.? I’ve had to re-calibrate the way I think about spending.
I used to pay my business expenses, taxes and living expenses, in that order. Whatever was left over was reinvested into the business. Now, after paying business expenses and taxes, I pay my retirement accounts. There is less money to reinvest in the business and less money for living expenses.
Predictably, this has made me a more careful and mindful consumer. If there is a piece of equipment that needs upgrading, I will purchase used instead of new. I have lowered my overhead by consolidating staff while taking on more work myself. I cook more meals at home and Trader Joe’s is my new Whole Foods. Living a bit more frugally has proven to be less stressful than I anticipated.
What Finally Helped
The anxiety of planning for retirement largely came from the worry that I might not be able to keep up with monthly or yearly contributions in a consistent manner. So I simply didn’t deal with it. What finally worked for me was?automating my retirement contributions. I made them realistic. I made them a fixed line item, like my monthly mortgage. Once I did that, I had no choice but to pay into the accounts.
Practically everyone is familiar with Warren Buffet’s ‘pay yourself first’ principle. When you are running a business, simply keeping it afloat seems like a tremendous accomplishment. Moreover, many of us believe our small businesses will in fact be part of our retirement plan. Unfortunately there seem to be fewer guarantees about the long term viability of any given small business these days. Industries, especially creative ones, are changing so rapidly, it is impossible to predict the value of an asset 20 years from now.
Although I’m more than a little late to the party, saving for retirement using traditional investment vehicles has paradoxically forced me to streamline my business and perhaps better prepare it for that uncertain future.
Darla Roost is a pen name for a gig economy creative professional thriving in New York City. Her dream is to share her stories and create a place where people can share theirs, too.?Photo by?Bonnie Kittle