Finance

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What are you doing with your "Economic Stimulus" tax money?

Dividends

That is the answer. Excluding splits, which are rare and unpredictable, reinvesting dividends from dividend paying stocks is the only way to get 'compound interest' type growth in the stock market. As I'm sure you were once aware (in that econ 110 class long ago), FV=PV*e^rt. r is the rate. t is time, PV is present value and FV is future value.

Right now is an interesting time in the market. The S&P 500 is down ca. 5% year-to-date. Gold is up 7% in the same time period. Silver even more. (Which really only means that the dollar is worth less - if you don't like gold, you can see it in oil. or milk. or ... but I digress). The one upside in the drop in the s&p is that yields of some stalwart blue-chips are up. While t-bills are yielding a pitiful percent and a half (1.45%), and your savings acount is likely worse. or not much better. There are a number of extremely well known stocks that are paying, 4%, 5%, and even 6% and up in dividends. Now, before scoffing at that yield, many of these same stocks are the members of the s&p 500 that have been pulling the average return of the s&p up for years. Take Pfizer for example. Big company. Rakes in billions (with a B) in revenue. And is currently paying out a 6% dividend! And if you think buying PFE for 6% is dumb, look at the track record of capital gains as well.

And here is the clincher. Pfizer has increased their dividend annually for the last 30+ years.
If you remember your math, you know the formula above is exponential and (eventually) gives the 'hockey stick' graph. Well, what happens when 'r' is growing in the equation above, according roughly to the equation above?

(too deep? too obvious? what do you think? -- oh, and if you learned all this before in school, please tell me how I *should* have payed attention)

Who's in charge of the money?

The Rule of 72

Once you are saving money, you have to get a return. Even in Matthew 25 we see that a return is important. (And yes, those talents are a monetary unit - see Exodus 38:24 and for a more thorough explanation, but I digress). Anyway, how long will it take your money to double?

Enter the "Rule of 72". My dad (THANKS DAD!!!) started teaching me about compound interest when I was about 10. And the easiest rule of thumb to figure out compound interest is to divide 72 by the rate (e.g. 10%apr), and that is how many years it will take your money to double (7.2 years in this case). Pretty handy huh?

So at 5%

72/5=14.x (since it is just an estimating technique, I won't bother with the decimal.)

It takes 14+ years to double what you have invested.

Caveats: - works for compound interest only (simple interest would be 100/rate). And it isn't perfect, but it provides a quick easy way to see what compound interest does.

cool huh? I've enoyed it since I was 10.

Rule #1 - Spend less than you make.

Sounds obvious doesn't it? But until you start spending less than you make, you will never be free of financial worry. Spending less than you make doesn't make you immediately free of financial worry, but it will help.

Most people find they can take 10% out of each check (preferably automatically before you ever see it) and not miss it. By putting this away for a rainy day, you will soon have an emergency fund. There is a lot of peace in having 3-6-?? months worth of living expenses securely tucked away, hopefully earning a decent return. Takes a lot of the stress of 'involuntary job changes' away.


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