It’s super easy. Let’s say you’ve got your money in a stock that grows by 6% each year, on average. Without buying any more of that stock, when will your money double through compounding alone?

Just divide magic number 72 by the interest rate (6%), and BOOM, you’ve got your answer! 72/6 = 12. In 12 years, your investment will double. So if you own $1000 worth of that stock right now, and it grows at 6% per year, it will be worth $2000 in about 12 years.

Of course, the “Rule of 72,” as this is called, doesn’t always work perfectly. You can really start to see it fall apart as you try to use higher interest rates. For example, 100% interest should double every year, but using the rule of 72, you’d get about 9 months. Hmm, that’s not right! But for most realistic percentages, it works out pretty well. (Because you’re not really going to find an investment that returns 100% per year, year after year, anyway. Sorry!)

The Rule of 72 can also be used to do a back-of-napkin calculation regarding inflation. As long as you can remember the Rule of 72, and the fact that inflation averages about 3.5% per year in America, you can figure out when the price of something is likely to double. 72/3.5 = ~20, so in 20 years you’ll be paying twice as much for a gallon of milk!

Play with it, have some fun! And remember, your money will double every x years, not just once. So going back to that $1000 at 6% example, not only will it be $2000 in 12 years, but it will be $4000 12 years after that, and $8000 12 years after that…

The Rule of 72 doesn’t allow for an easy calculation of it, but now imagine how your money would grow if you were investing $1000 each year, instead of just once. Ooo… I just got goosebumps!

No related posts.

This series “12 Things Every Teenager Needs To Know About Money (And How To Teach Them)” is a community blog experience.  This post is only one of the 12 points in the series so to view the other 11, please visit the list of links below.

Two Words: Compound Interest

We all remember those days of sitting in a math class listening to a teacher talk about theorems, abstract algebra, or differential equations.  And the entire time this lecture was going on, we all asked ourselves the same question:

When am I ever going to need this?

Don’t deny it.  You had the same thought I did.  And a lot of class periods that question popped into our minds except for the day we talked about (wait for it)…

Compound Interest.

Ok, maybe you still didn’t grasp compound interest then, but hopefully you’ve seen the light by now and wished you did grasp it better back then!  When it comes to personal finance, that one simple math concept can be your best friend or your worst enemy.  Here’s one way of looking at it…

Which one of these options would be worth more?

1. Ten thousand dollars per day for 30 days.
2. One penny that doubles every day for 30 days.

Option #1 would be the better choice for the majority of the time until you look at how the race finishes up.  By the end of 30 days, option #1 would be worth $300,000.  Not bad at all.  But by the end of 30 days, option #2 would be worth (drum roll please)…

$5,368,709.12!!!

Pretty wild huh?  So how do you teach this to a student?  Here are some tips…

• Show Them The Numbers – Although most teenagers aren’t “number nerds,” they can still see that $5,368,709.12 is a better option than $300,000.  When students look at the possibilities and you teach them they have an advantage, even over you as the parent, it begins to click for most teenagers.  Time is on their side.

• Help Set Up A Roth IRA – The best investment option for taking advantage of compound interest at a young age is by setting up a Roth IRA.  The only eligibility requirement is that your teen has an earned income.

• The Tortoise Always Wins The Race – Adults aren’t the only ones looking to get rich quick.  Teenagers fall into that category as well.  Part of your role as a parent is to teach them how slow and steady wins the race.  Teach students to not count on striking it rich in the lottery, winning big on Deal or No Deal, or opening their front door to the prize patrol.  The rabbit may seem faster but the consistency of the tortoise wins the race.

Curious about the other 11 things every teenager needs to know about money? Check them out at the following sites:

• Money Doesn’t Grow On Trees @ Bargaineering.com
• Two Words: Compound Interest @ PoorerThanYou.com
• Delay Gratification To Succeed @ GatherLittleByLittle.com
• Living On A Budget Isn’t An Option @ TotalCandor.com
• Credit Cards Will Steal Your Lunch Money @ PTMoney.com
• A Degree Is An Expensive Piece of Paper @ TheDigeratiLife.com
• Spend Money Based On Needs Not Wants @ MoneyNing.com
• There Is More Free Money Than You Realize For College @ FreeFromBroke.com
• Living On Your Own Isn’t Cheap @ Studenomics.com
• Taxes Are A Necessary Evil In Life @ MoneySmartLife.com
• Do What You Love, Love What You Do @ GenXFinance.com
• Don’t Be A Tightwad: Give Generously @ CashMoneyLife.com

Related posts:

1. Back to Basics #1: Time

So, if you anything like me, you might need it boiled down before you can start digging in and trying all the tips, tricks, and plans outlined on the internet and in personal finance books. Hey, I understand – I was there, and I feel like I wasted a lot of time just trying to figure out how to start.

So, to save you a little time, I’ve thrown together this Quick Start Guide, pieced together from my favorite bits of other personal finance blogs and books (links at the end), and from my own experience. It’s only three steps, so don’t panic! Enjoy!

RULE ZERO: SPEND LESS THAN YOU EARN

Rule Zero is at the heart of everything else – everything in this guide, everything on this site, everything on the other PF sites and in all the books. Spend less than you earn, and save the difference. But how? HOW?

Step #1: Track what you spend

In order to spend less than you earn, you have to know what you spend, and what you earn. Knowing what you earn is generally pretty easy – for most people, you just add up your paychecks, and you’re done. Boom. But what you spend? That tends to escape most of us unless we write it all down.

I don’t care how you track it. I use a simple Excel spreadsheet that I made. A lot of people use a little notebook and pencil that they carry around with them at all times. Some people keep all of their receipts in one place and then write it all down at the end of the week. Some people carve it into a wooden block, because those people are crazy.

This step is rather important, so I implore you not to skip it. Of all the tools I have made for myself on my journey to financial freedom, none have been as useful to me as my spending list has been. I’ve been keeping it for over a year now, and I still wish I had more data. (I love data.)

Step #2: Don’t pay the bank, make the bank pay you

Once you start tracking your spending, you’ll probably see a few expenses that you just wish you weren’t paying. If any of those expenses are bank fees, stop. Stop now. If you really like your bank, go in and ask if you can have the bank fees waived for your account.

If that doesn’t work (or if you just want to switch banks), shop around for a free checking account. You can usually get a free checking account pretty easily if you’re a student, or if you can do a qualifying monthly direct deposit. Or you can use ING’s Electric Orange checking account, which has no maintenance fees.

Also, make sure you have a savings account, and that it’s paying some actual interest. Most brick-and-mortar bank savings accounts offer interest rates around .2% (that’s POINT two percent, or one fifth of one percent), and considering inflation averages out at about 3%, that makes your “real” interest rate around -2.8%. That’s terrible. Online savings account offer rates upwards of 4%, which beats average inflation and gives you a little something extra. I have online savings accounts with Emigrant, E*Trade, Citibank, and ING Direct, and although I’ve never had any problems with any of them, the one I recommend more than any of the others is ING’s Orange Savings.

Step #3A: Take down debts

(If you’re debt free or your debts all have interest rates of less than 8%, skip to Step #3B.)

Debt – your future money that someone else has a claim to. Ick – let’s get rid of that. Use this calculator to snowball your debts – whether you pick the “interest order” or the “balance order” depends on whether you feel better knowing your saving the most amount of money, or feel better knocking down debts as if you were shooting in Duck Hunt.

If you have some wacky debts that make it impossible for you to use the snowball calculator with any sort of accuracy (for example, you might be like me and have student loans that are in deferment), then just rank them for yourself on a piece of paper. But no matter what, pay the minimum payment on all of your debts every month and throw whatever else you can at the debt on the top of your snowball list. 

 Step #3B: Save up some savings

Start with an emergency fund. You probably know better than anyone how much of one you should probably have, but the rule of thumb that’s generally thrown around is “3 – 6 months worth of expenses,” more if you have dependents. If you’re a college student or anyone else with strange, unpredictable, lower expenses, you might just want to pick a nice round dollar amount, like $1,000.

Don’t feel like you have to build this all up as fast as possible, although it is important, so don’t shrug it off either. How much you throw into your savings probably has a lot to do with whether you have a lot of debts from Step #3A or not. If you’re paying on a lot of high interest debts, it makes more sense to worry about knocking those out, and only build your savings up by about $10-$20 a week (or per month, if you’re a college student or younger). Otherwise, try to save at least 10% of your income, bare minimum – more than that is better.

It might hurt at first, and you might not even be able to save that much at first. Don’t freak out – just save something. Even if it’s $5 a month. Or $1 a month. Get in the habit and try to increase it each month. The habit is 90% of the process, the dollar amount is only the other 10%.

(It might seem obvious to some people, but this savings should be going into a high yield account, like one of the ones I suggested in Step #2.)

Beyond (Thunderdome)

Once you’re tracking what you’re spending, your bank accounts are in order, you’re snowballing your debts, and putting something aside into savings, you’re ready to start sifting through the vast amounts of information out there. Time to move into budgeting and frugality and retirement accounts and all of those things that might seem very daunting right now. Once again, don’t panic. You’re already ahead by having made it through this guide, the next steps are just as simple.

Like I said, this quick start guide is borrowed and pieced together from the things I read when I was starting out, and the things I’ve read since. Once you’ve made it through this guide, here are three other guides that you might want to try out:

• I Will Teach You To Be Rich » 2006 Makeover – This link leads you to Step 4 of Ramit’s makeover, which includes links to the previous three steps.
• The Simple Dollar » 31 Days To Fix Your Finances: A Wrapup – Trent’s super-comprehensive guide will have you examining your goals and developing a definitive vision of 
• 8 Ways to Take Control of Your Finances in 2008 ∞ Get Rich Slowly – As usual, JD says more than me, better than me, in less words. Check it out!

Photo credits: YTaP’s “Eat Money”, Kris Taeleman’s “Money, i has it!” and Digital Sextant’s “Money”

Related posts:

1. Three Quick Financial Fixes for College Students
2. Financial Breakdown
3. The Best Time to Start Thinking About Money

I owe just under $1,000 on my credit card. They really got me this last time. In July they tacked on the late fee because I didn’t pay by 2:00 on the deadlined day!
Have you ever heard of this? Now it’s just getting worse every month. What can I do? My credit report is not excellent either and my future is grim? What can I do? Please help.
Thanks
Hollie

The usual disclaimer: I’m not a financial adviser, and even if I were, I don’t know the specifics of Hollie’s situation or anyone else’s who might read this. All I can do is tell you the processes I go through, and what I might do myself in Hollie’s situation.

First of all, Hollie’s future is not grim. There are no money problems that can’t be fixed with time and effort. Things fall off of credit reports eventually. Debts can be repaid. And late fees can be waived.

Unfortunately, the credit card companies are well within their rights to charge a late fee for not paying by 2:00 on the due date - assuming it’s in the lengthy and unreadable terms and conditions, which it probably is. Unfortunately it sounds like it might be too late to do this in Hollie’s case, but it might be possible to get such a late fee waived. A polite call or email to the credit card customer service might just get that late fee refunded.

Whether or not that late fee is refunded, it’s now time to take steps to make sure it doesn’t happen again. Here’s the system that I use to avoid late fees and overdrafts. In fact, the following is the basis for my whole financial plan (it isn’t really a “budget” per say, but it could be the basis for a budget):

1) Calculate how much you have to pay each month
This is the bare minimum you have to pay on every bill. For me, this is my minimum credit card payment, my car payment, my laptop payment, and my student loan. Later on in life, this will include rent, utilities – anything that absolutely must be paid each month.

I like to add a dollar to the minimum payments for the credit card and student loan, for credit reporting reasons – that way it won’t show up as “minimum payment” on my credit report. But if I were really strapped for cash, I could go back down to the absolute minimum payments.

Once I have all of those things written down, I add up the total.

2) Calculate how much you have coming in each month
This can include one-time “cash reserves” – in other hand, the money I already have in my wallet, checking, and savings accounts. I add that to the amount I expect to make over the next month. I keep in mind though, the cash reserves are “one time only,” – but I’ll come back to that in a later step.

3) Is the total from Step 2 more than the total from Step 1?
Hopefully, the total from Step 2 is more than the total from Step 1 without counting the cash reserves. If it isn’t, I have a small problem: eventually, I’m going to start running out of money and start falling into more debt than I’m already in.

The problem is even bigger if the total from Step 2 is less than the total from Step 1, including cash reserves! Either way, if the answer to this question is “No” (with or without cash reserves), then I need to go to Steps 3a and 3b. If the answer is “Yes,” then I can move right onto Step 4.

• 3a) Can I cut any expenses?
  Are there any expenses from Step 1 that I can cut or reduce? In my case, it would be rather difficult. I can’t return my laptop or my car, and I can’t stop making payments on my credit card or student loans.
  However, if I had things like cable, Netflix subscription, or anything else that isn’t completely necessary, I could find ways to temporarily reduce the price (drop down to a lower tier package) or I could temporarily cancel them.
• 3b) How can I make more money?
  If I can’t cut any expenses, or I do and it’s not enough, I absolutely need to figure out how to make more money. Pick up more hours on my job? Get a second job? Make some money online? Whatever I can do to get the bills paid.

4) Pay the bills when they come, not when they’re due
This step is key. Instead of opening my mail and saying “ok, the credit card is due on the 25th, I have to remember to pay that” – I ignore the due date completely. I head right to my computer and pay the bill online. Or I cut a check and mail it off right then.

Why? Because this completely removes the chance of late fees. And, as an added bonus, it gives the balance on my credit card less time to accrue interest. And it saves me from having to remember to do things “before they’re due” – which is something I’m horrible at!

What if I don’t have the money in my account to pay the bill the minute it comes? Well, I stick it in my “inbox” and as soon as the next paycheck clears, the second thing I do is pay the bill. What’s the first thing? I put 10% of the paycheck into my savings account. My savings are the most important bill of all – they get paid first.

5) Keep it going
Find a way to keep track of it all: “How much is going out every month? Do I have enough coming in to pay it? Did I pay that bill this month?” I keep track of everything in an Excel sheet I made myself, but there are many other free options available on the internet. The one I most recommend is Pear Budget. It’s free and extremely easy and simple to use. And it gets the job done.

Hollie: Don’t fret. You can do this, I can tell. Since you’re reaching out to me for help, I can tell that you want to fix this. And that’s all you need to get started: the will to help yourself. It’s where I started out, and it’s what helps me get through every single month.

Related posts:

1. Fees Suck – Don’t Pay Them
2. Moving: 8 Tips to Avoid Scams on Craigslist
3. Avoid Income Tax Without Calling Down the Wrath of the IRS

I’m going to give you guys a warning, though: if you came looking for the sexy answer, you’re barking up the wrong blonde blogger. I’m not going to give you a one-liner like “invest in gold and you’ll be set for life!” Sorry, but I’m going to give you the real down and dirty (that sounds sexy too… but it’s not).

Step 1: The Fun Part
Estimate your income. This is easier to do after your first paycheck, because then you can see exactly what percentage they’ll be swiping up for taxes. But even if you haven’t received that first paycheck yet, estimate away. You can adjust it later.

Step 2: The Depressing Part
Estimate your expenses – a new jobs means they’ve likely changed. I recommend you download and use PearBudget – it’s a free, really easy to use program that runs in Excel. Or, at least use the Pear way of dividing up your expenses:

Regular expenses: monthly expenses that don’t change in amount. E.G. Rent, car insurance, cell phone bill, savings…
Irregular expenses: “things that come up a couple of times a year that you know you need to budget for. For example, you know you’ll spend about $1,800 on car maintenance over the year, but you won’t pay it on a regular schedule. So you budget $150 every month into “Car Maintenance,” and then, on some sad day, you’ll have to give the mechanic all that money.” Other examples: gifts, travel…
Variable expenses: monthly expenses that vary in amount. E.G. groceries, dining out, gas for the car…

Step 3: Try Not to Faint
Take your estimated income for one month, and your expenses for one month… and hope that the first one is larger than the second one. Actually, if you included savings in your expenses, they should be the exact same number. But, they probably aren’t. So… “what do I do…”

“…if my income is more than my expenses?”
In all seriousness, this is a question you would probably never ask me. But if you truly estimated all your expenses accurately, and you came up with this, then you do have a problem. I know at least one of you has some hefty credit card debt playing the monkey on your back. And you need to deal with that. For serious!

Don’t put anything more on those credit cards. Not a red cent. Go cut them up, now. I know, I’m a mean Stephanie, and I don’t want you have any fun. Deal with it. Don’t charge anything else until you’ve paid them both off. (Hey, at least I didn’t tell you to sell your trombone!)
Use that extra cash to really, really work on paying down that debt. I’m assuming it’s high interest, and it’s definitely dragging your credit score down at this point. Just remember, if you only make the minimum payments, it’ll probably take you upwards of 30 years to pay off those cards. I don’t know about you, but I certainly don’t want to meet up when you and I are 50+ and find out that you’re still paying off some charge from 2006.

And if you don’t have any nasty credit card debt? Pump up your savings, and feel mighty proud. Also, know that I hate you.

“… if my expenses are more than my income?”
Ouch… but this was always a likely scenario. You’re going to have to cut down an expense. And no, don’t go for the savings first – that’s like sticking a knife in your own jugular. I’m not going to tell you what expenses you should trim, because I know you’re smart, and you’re the one that has to live with the decision. Find some fat, and trim it.

Make sure you do put away some savings, though. Even if it’s just a dollar a week, get in the habit. It takes about 3 months to establish a weekly habit, so by then you’ll have over $12 (whoopee!), but more importantly, a good habit for life.

Step 4: Just Do It
Live your life, track your expenses, adjust PearBudget (or your tracking system of choice) as you go along. There really isn’t any secret formula – in fact, I’m rather sure there wasn’t anything here that you didn’t already know… somewhere in the back of your mind.

Oh, and about that savings: make sure you’re putting it somewhere that beats inflation, like a high yield savings account. You know how much I love ING Direct (aff), but so long as you’re saving, I’m happy.

No related posts.

I shouldn’t get so annoyed about it. Commercials, ads, banks… everyone throws the two words around all the time, and it’s easy to get confused. But if you have any interest in taking control of your own money, you ought to learn the difference.

Credit is the ability to borrow money. Debt is money owed. To give an example, if you knew that you could borrow $1000 from your parents at any time, that would be a line of credit. If you owed your parents $1000, that would be a debt.

Credit is important because it’s one of those “you need it to get it” things, especially if you’re trying to open up a larger line of credit, such as a mortgage.

There are some people that make a point of trying to live without credit. Since credit is the ability to acquire debt, people see it as a temptation. And to be fair, it is. However, I think it’s somewhat foolish to completely abstain from credit, because it’s become so ingrained in our modern lives.

The Dreaded Credit Score
Not only do you need credit to get credit, but you need to prove to creditors that you’re low risk. That you’ll pay them back any of the debt you incur on this line of credit. And unfortunately, you can’t just have your mom write you a note, vouching for you. Instead, creditors will pull up your credit score.

I don’t want to bore you too much, but your credit score is just a number, derived using “secret math,” that shows how responsible you are. A credit score can be pulled not only by creditors, but also by landlords when you’re applying for an apartment, and even by employers when you’re applying for a job. No joke – I just picked up an application for a job at the mall, and it came with a ” Fair Credit Reporting Act Disclosure.”

Since your credit score is so important to so many aspects of you life, you really ought to know what it is. This can get pretty confusing, because there are tons of different types of credit scores. The most common and most trusted, however, is your FICO score. Actually, there are even three different FICO scores, just to confuse you further. That’s because there are three different companies (Experian, TransUnion, and Equifax) that collect credit data on you and compute your FICO score from it. Lost yet?

Getting Your Score
If you want to grab one of you FICO scores, you can do it for free. MyFICO.com’s ScoreWatch* let’s you see your FICO score, and the credit report that is used to calculate it. It will also tell you what that score means to you, and offers a cool thing called Score Simulator, which will let you see how different actions (such as maxing out your credit cards, or paying off all your debts) would change your score.

ScoreWatch monitors your score and updates it daily. You can get the 30 day free trial, and cancel before the 30 days are up if you don’t want to continue monitoring your score. If you decide to continue on, you’ll be charged $90 for a year of monitoring. I would recommend this to anyone serious about improving your credit drastically over the course of the year. But if you’re simply curious about the score, you probably don’t need it past the 30 days.

Back To Basics is going to focus on credit scores and credit reports for a little while, so don’t be worried if this post left you with questions. For now, just check on your credit score, and be careful to protect it. That means no late payments, even on the electric bill!

*Affiliate link.

Related posts:

1. Back to Basics #3: Checking Accounts
2. Back to Basics #0: Introduction
3. Back to Basics #1: Time

Savings accounts are cool and all, but sometimes, you actually want to be able to exchange your money for goods and services. Checking accounts make this easy to do, by allowing you to fill out a little form, appropriately named a “check,” handing over some of the money in your account to someone else.

No Interest?
Although, just like in a savings account, the bank is borrowing your money, they don’t pay you any interest on it. Your money sits there and doesn’t grow at all. This is almost like a “fee,” you’re forgoing the interest in favor of easy access to your money – at least, in most cases. Some banks have checking accounts where if you keep enough money in the account (usually north of $5,000), they’ll pay a very small amount of interest on it.

New technologies have profoundly changed the way we use checking accounts. Debit cards, which are basically the hybrid of a check and a credit card, allow you to easy spend money out of your checking account. They’re also a nice way for the bank to try and get more of your money.

Overdrafts
If you draw out more money from your checking account than you actually have in there, you’ve done something called “overdraft.” There’s a series of different ways the bank might handle this, but most of them involve charging you a fee of some kind.

One thing you can do is have your bank set it up so that if you overdraft, the bank can just take the extra money out of your savings account. But the best solution is simply to pay attention to how much money you have in the account, and not spend more than that. Seriously, it’s not that hard, especially now that you can check you balance from home, using the computer, as many times a day as you want.

Checking on the Interwebs
The other technology transforming checking accounts is online bill-pay and echecks. Using just the account information for your checking account, you can pay many businesses online, including most of your bills. It’s gotten to the point where many people don’t even use paper checks anymore.

Which is where the online banks are starting to swoop in. If you no longer need paper checks, then you can get an online checking account. ING recently rolled out their online checking account, “Electric Orange,” which can be used for online bill-pay and echecks, and comes with a debit card, but no paper checks. However, you can contact ING and they will issue a paper check (for example, to your landlord). Still, the account pays 3+% interest on money sitting there. For the time being, this account is only open to customers who have an ING Orange Savings account, but that’s easy to get, with no fees or minimums.

My philosophy when it comes to my checking account: don’t let money sit in there, earning no interest, if I don’t have to. I only keep enough in there for what I’m going to need in the next two weeks.

Related posts:

1. Back to Basics #2: Savings Accounts
2. Rethinking my Bank Accounts
3. Using ING Sub-Accounts to Save Hundreds on Student Loans

So obviously, it’s better to keep your dealings with the bank in the “savings” category, and not the “loans,” category – although that’s not always possible. But if you think about it, if you have a savings account and a loan at the same bank, you’re buying your own money back from the bank at a much higher rate. Ew.

So how much is the bank going to pay you for the privilege of selling your money? Usually, not much. My own savings account earns about 0.2% interest annually, which is about the average. Considering I barely use the account, there’s only about $15.00 that just sits in there, earning 0.2% interest. At the end of the year, that’s only about 3 cents a year that the bank pays me for my $15.00.

Even if I ramped up the amount I kept in the account to $10,000 (which would clearly mean I robbed the bank and then deposited that robbery money right into my savings account, which would be convenient!) that money would only earn $20 over the course of the year.

So why bother with the savings account at all?
For one thing, the money in a savings account is a little tougher to get at than the money in a checking account. Sure, you can get it out with your ATM card, but you can’t get at the money with a debit card or check. This encourages you to save, rather than spend – hence the name of the account.

And the other thing is, although you might not be earning much interest on your money, you are earning some, which means it’s better than stashing the money under your mattress.

But I want more!
Oh, it can be done! 0.2% interest is pretty dismal, especially when you realize that inflation is about 3% a year – meaning that your money in a savings account is actually losing value. Ick! So, can you beat out inflation with a savings account?

Oh, you totally can, thanks to the internets! Online savings accounts offer much, much higher rates. Why? Because they’re online, that means the banks don’t have to pay tellers or security guards or even janitors – they can just hire a few customer service people to man the phones. This frees up a bunch of their money to pay out to you, for using their savings accounts.

And of course, the banks go to great lengths to insure their databases are secure, so there isn’t a whole lot of worry attached with doing your banking online. You establish a “connection” between your new online savings account and a checking account that you already have. This allows you to electronically move money back and forth between the two accounts. You’re limited to 6 electronic transfers a month out of a savings account, but there’s no limit on transfers of money into one.

Ok, cool, hook me up.
Hold on, cowboy. Choose the right online savings account. This may not be the end-all-be-all decision of your lifetime, but it certainly warrants some thought. Here are the three accounts I would recommend:

Emigrant Direct
I opened my first online savings account with them, and I had a little trouble getting the account set up, but that was mostly my fault. They offer 5.05% annual interest on your money, which is so much better than that paltry 0.2% the brick-and-mortar banks want to buy your money for.

E*Trade
I opened my second account with E*Trade while they were having an “Open an Account with $1 and get a $25 bonus!” deal. This account also offers 5.05% interest, and I also had some dealing with their customer service (once again, the problem amounted to me being a dumb-dumb).

ING Direct
ING’s Orange Savings Account trails the pack in interest rates, offering 4.5%. However, those who have an account with them spend lots of time giving glowing recommendations to their customer service. I have a special place in my heart for good customer service, so I will certainly take the interest cut someday. ING offers a $25 bonus if you sign up with a referral link and deposit at least $250.

Which of these accounts you chose is up to you. There are other accounts out there, some offering even higher interest rates. The important thing to do is figure out what matters to you most about a savings account, and pick the bank that best embodies that quality. If it happens to be local banking that matters to you most, then it might even be your brick-and-mortar local bank.

Related posts:

1. Back to Basics #3: Checking Accounts
2. Don’t Chase High Rates for Savings Accounts
3. How Much Interest Would $1,000,000 Yield?

But my friends that have an aversion to helping me organize my sock drawer actually are correct. Time is money in so money ways. We spend money on countless things that give us the impression that they’ll save us time. We use money to buy things to fill up the time.

But it’s through the glory of compound interest that we can really see the glowing relationship between time and money. For definition’s sake, there are two kinds of interest:

Simple Interest: If you earn 5% “simple interest” on $100, you’ll end up with $105, and it will never grow any further. Simple, eh?

Compound Interest is the interest that we all know and love (or in the case of debt interest, “know and loathe”). If you earn 5% “compound interest,” compounded (meaning “calculated and paid out”) every year, you’ll get $105 at the end of the first year. But it will just keep getting “calculated and paid out” every year. So at the end of year two, you’ll have $110.25. And after year 50, you’ll have $1146.74. Compound interest is obviously better than simple interest – unless we’re talking about debt interest, in which case you’ll owe $1146.74 after 50 years, in which case you’ll probably shake your first, look up at the sky, and curse compound interest.

But ignoring debt interest, we can be happy that most situations call for compound interest instead of simple interest. And time is compound interest’s key ingredient. Sure, having lots of money to save and invest is great, but having lots of time is actually better. If you have lots of time before you’re going to want that money again (say you’re 16 years old and thinking about your retirement fund), then you can put a relatively low amount of money away, and let time do most of the work for you (in this case, you put away just $8000 and end up with over $1,000,000).

On the flip side – and I’m not pointing this out to depress you – let’s talk about student loans. It’s easy to wrack up $8,000 in student loans (I pulled down that much my freshman year!), and one of the fun things about student loans is you can never escape them – not even through bankruptcy! So let’s say you have 10.7% interest on your student loans (which is outrageous for student loans, but it makes my example work, so just stick with me, ok?), and you duck out of paying them for 47 years, and finally, those $8,000 worth of student loans catch up with you. How much do you owe now?

Just like the 16-year-old that puts $8,000 away for retirement, you have over $1,000,000 – IN DEBT! Yeah, I bet you wish your hypothetical self had made your student loan payments now, don’t you?

So time can be your best friend, or your worst enemy. But you already knew that from all of your other dealings with Harsh Mistress Time, didn’t you? So what should you take away from this (aka “If You Didn’t Read Anything Up Till Now”)?

• When it comes to savings and investments, put time on your side and start immediately, because time is worth more than money.
• When it comes to high-interest debt, focus on paying it down quickly, rather than over time, because time will just make it worse.

Related posts:

1. Back to Basics #2: Savings Accounts
2. Back to Basics #3: Checking Accounts
3. Back to Basics #4: Credit

But I digress. In “Back to Basics,” I won’t just go over the definitions of things, because that could get really boring, really fast. And I’ll try not to use too much math, either. Instead, we’ll look at ways to maximize the basic aspects of personal finance, which will in turn largely put things on autopilot.

And autopilot is good, because it means less math for you!

Yes, I know you’re just brimming with excitement over the idea of “not math,” but please, try and hold it in – I just had the blog’s carpets cleaned.

Related posts:

1. Back to Basics #4: Credit
2. Back to Basics #3: Checking Accounts
3. Back to Basics #1: Time