The Savings Habit, Dollar Cost Averaging and Compound Interest -Chapter 2

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If you have read my Blog from yesterday and you go through the SPA Review, you know where your money goes. Now  you can start planning on how to save.

To do this you have to develop, “The Saving Habit.” When you start saving money it becomes habit forming. It will be like a drug. You will not get enough of it.

Here is my first tip: do not tell anyone how much you are saving. People who believe you have a great amount of money will ask you for it. You will get letters from every charitable organization you know and don’t know. Everyone will in your family, your church and any organization you belong too will have their hands out. Ask yourself one question. If you outlive your money, will those people be there to help you?

I, therefore, highly recommend you learn to say “NO”, and keep your savings to yourself.

Once this is done you are ready to move to the next level. It’s time to start investing in a Defined Contribution Plan or an Individual Retirement Account (IRA). Before you dive into investments. Read my book, “A Beginners Guide to Wealth Building”, Chapter 2 entitled “Gauging Your Investment Attitude”. It’s a simple risk analysis test of your knowledge of investments.

After all of the above, you can start investing using a method called “Dollar Cost Averaging” and the “Magic of Compounding. Dollar Cost Averaging means investing a little bit at a time. The Magic of Compounding means you earn interest upon interest that grows exponentially.

An example of how these two simple work together: Invest $166.00 each month into a your retirement plan. That equates to $2,000.00 per year. If you earn 10% in the first year, you will earn $200.00. At the end of one year you have $2,200.00. Using dollar cost averaging you will invest $50,000 over  a 25 year period. The magic of compounding will turn that $50,000 into $197,000. Not bad, investing $50,000 and getting four times that back. Just think if you investment more. $300.00 per month at 8% compounded over 30 years will equal $447,108.00. Not bad for retirement.

The goal is to plan. Remember one important fact, “A Goal Without a Plan is a just a Wish. Do not make wishes. Create a goal and plan for your retirement.

My next blog will be on the two most important words in investments, “Asset allocation” and “Diversification”.

See you on Monday for that lesson.

Love hugs,

Robert L. Woods (R. LaMont W.)

Robert L Woods

Robert L Woods

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About Me

Robert L. Woods is the retired partner of the Institute For Fiduciary Education (www.ifecorp.com) that provided investment seminars for public and private pension funds, endowments and institutional fund managers. He spent 28 years working for the State of California, as a budget and financial analyst which includes 16 years as an Investment Officer for the California State Teachers’ Retirement System (CalSTRS). At CalSTRS, he established it as one of the nation’s first institutional home loan programs with a down payment assistance component. He also spent 13 years on the Board of Trustees for the Sacramento County Employees Retirement System (SCERS). He was a Trustee with the University of California, Davis, Cal Aggie Alumni Association and a member of the Chancellor’s Council on Community & Diversity. He is a Life Member: Phi Beta Sigma Fraternity, Inc., Theta Gamma Sigma Chapter, Sacramento, CA.

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