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The Powerful Building Blocks of Your Money
When I grew up, video games were definitely around but board games were still popular too. The board game Monopoly, with its real estate focus, was my favorite!
Little did I realize the unexpected lesson I learned from Monopoly. All players began with a specific amount of spending money, including two $500 bills. I always hid one $500 bill under the board. When I hit a rough patch and friends thought they won, I would pull out that hidden $500 bill. Sometimes that was enough to allow me to win! One friend called that $500 bill my "emergency money."
Today, I still keep in touch with that friend. I still set aside emergency money too, but for real life events; it is more than $500 and I keep it in the bank, not under the playing board! Beyond the cable and satellite TV packages, beyond the cell phone plans and beyond the daily purchase of that mocha latte that tastes so good, there will be emergencies. This is a key reason to regularly deposit money into a savings account.
Car repairs, home repairs, medical emergencies and other surprise expenses occur a t the most unexpected times. Be sure you have your own emergency money to cover these unanticipated expenses. Otherwise, if you cannot afford the car repair you may not be able to get to work. When you are not able to work you will not receive a paycheck. When there is no paycheck, there will be no way to enjoy the cable TV package, the upgraded cell phone package and that delicious mocha latte.
When you save money in a savings account, the focus should be on the foundation or the basic needs of your personal finances. This money is for emergencies and day to day needs like food, utilities, home or rent payments, insurance and auto expenses. When you can cover these needs each month, you can set money aside for additional goals such as a vacation, a new vehicle or holiday gifts.
Regularly depositing money into your savings account allows you to unleash something very powerful with your money-compound interest. Think of compound interest as a snowball of cash at the top of a hill. Once that snowball rolls to the bottom it can be huge! Money in your savings account grows the same way, provided you add money to your savings on a regular basis and do not withdraw more than you put in over the long term.
The key is with the interest you earn on your savings account. When those interest payments come, keep them in your account. Those interest payments are the actual power of compound interest; they fuel the growth of your money over the long term!
When you have a solid foundation with your savings, you can add blocks onto that foundation by taking some reasonable risk. No, this does not mean you should take a gambling vacation to Las Vegas! Instead, by regularly investing some of your money in the stock market, you can further harness the power of compound interest.
Some of your investments will pay you dividends. By keeping those dividend payments within your investments you can super charge the power of compound interest, especially for retirement or another goal that is many years away.
There is a difference between saving and investing. That difference is risk. With most bank or credit union products, you will not lose money as it is federally protected. When it comes to investing, there are normal swings in the stock market-in other words, there is risk. Sometimes these swings can be large and the value of your investments will drop significantly. Other times you may see a sizeable increase in the value.
Risk is a normal part of investing. However, if yo u invest regularly and consistently over many years for long term goals, you often make up for any losses in the markets.
As the years pass and you slowly approach retirement or other long term goals, you can gradually sell portions of your investments over time. Those profits can be placed into lower risk bonds and no risk banking products, providing money for your retirement. This helps to decrease your risk should there be a downturn in the stock market.
Your final building block is your lookout tower. Villains do not only exist in games. There are financial scam artists who want to offer you a "great investment opportunity." In other words, they want to take your money and run.
Before you work with any investment professional, call the Pennsylvania Securities Commission. All investment professionals are required by law to be registered with us. You can always obtain a free, confidential background report at any time by calling 1-800-600-0007 or 717-787-8062. The PA Securities Commission website at www.psc.state.pa.us/investor has numerous investor education and fraud prevention resources.
The PA Securities Commission offers a variety of educational speaker presentations at no cost for various age groups. High school teachers and educators may especially be interested in our Save & Invest PA! speaker presentations for students which discuss saving, investing and avoiding financial scams. E-mail Doug Hassenbein to schedule a presentation.
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