Money needs a place to park.
So you can think of this column as an AI Parking Assistant. We’ll be working together to slide into the best parking spots with minimal effort, above average safety, and optimum results.
But, unlike driver assisted cars, you get to see the program and participate.
For starters, the important question is “What is the best parking place?”
There are several answers.
A wallet is a good place to park money you might want to spend on the spot. It’s fairly safe, though you can always lose cash. It also avoids leaving the digital footprints of credit cards.
True as all that may be, nobody keeps a lot of money in their wallets. Cash basically is “dead money.” That money is not working for you.
A fundamental value of money is work. You earn money with work. You want it to work for you.
That’s getting bang for your bucks. Money in wallets, or under the mattress, in totally bang-less.
Money earned by money at work comes in many forms – like, interest, investment gains, just for starters. Any money at work beats any “dead money” – with only one exception. The only thing worse than dead money is losing money.
There always are trade-offs between safe money and harder working money.
So deciding where to park money takes three basic steps:
First, figure out what the money earns when it is parked in any particular place.
Then, decide what the chances are of losing any of it.
That let’s us decide how to take step three: How much money gets parked where.
Step 1: Figuring Out What Money Will Earn
Rates & the Magic of Compounding
The amount of work money does for you gets different names. There’s “interest” you get on your bank savings. (The flip side is the interest you pay out on your mortgage or credit card or car loan.) There’s “gain” on investments. There’s also “yield” such as dividends paid to you when you own certain stocks.
They all are different names for how hard money is working for you.
What money earns at work for you comes from two numbers. First, the “rate” (of interest, for example). Second, how the rate “compounds.”
Compounding is the magic number. Compounding is earnings that money gets on earnings, year after year. So time counts. The more time money compounds, the more it earns.
Here’s an example. Put $50,000 in an account that earns 9% interest every year, compounded monthly, and leaves it there for 45 years. At the end of the 45 years, that account is worth $2,826,829. The miracle of compounding. (You can think of it in reverse. If you have a 30 year mortgage, almost all your payments in the first 10 years go to pay interest. There’s so much interest, it takes decades to pay back the principal of the loan.)
Compounding is such a hard worker, you do not need that $50,000 nest egg. Suppose you just put in $500 to start. That’s right. Hundreds, not tens of thousands, of dollars. But this time, you just keep saving $500 every month in the account – at the same 9% interest rate, compounded monthly. You end up with more – almost a million dollars more ($903,879 more, to be exact). In 45 years, that account will total $3,730,708.
Starting with just $500. Sticking to it. And letting compounding do the rest of the work – while you sleep. You can do this.
Stick with this series. We’ve got more to show how!