Spend or Save – What is the Right Philosophy?
Spend or Save has arguments on both sides of the isle.
Many will say, ‘why must I must invest and plant dollar seeds for the future? Let me live in the present and be merry. Who has seen the future? It is the present that matters.’
The problem with this philosophy is that you will continue to work for money. There will be no respite for you even in your old age, when you want to slow down and be looked after. Your money problems will continue to haunt you. The ‘pleasure-now’ philosophy is full of ugly potholes.
On the other hand, if you take the trouble of making some changes in your spending habits and start planting dollar seeds of investment then your life will change as soon as the compounding kicks in, and the dollar tree becomes big and powerful. It will also start giving more seeds and as a result, start multiplying further. The money then starts working for you, and you will find financial freedom.
How much to spend? How much to save and invest for the future? Those are profoundly philosophical questions. Each one of us has to find the right balance that is correct for our family and us at a particular point in life. But whatever the situation in life, we have to find dollar seeds to plant or our lives will never change for the better.
The Rule of 72
It is important to understand how fast your money multiplies when you invest.
An easy method to calculate compound interest problems in your head is by applying the Rule of 72.
By using this rule, you can find the number of years that are needed to double your money at a given interest rate—you simply divide 72 by the interest rate!
For example, if you wish to find out how long it will take to double your money at 8% interest then divide 72 by 8, and the answer is that it will take 9 years to double your money.
The rule of 72 is very accurate, as long as the rate of interest is less than 20%.
You can also run the problem backwards. If you want to find out at what rate of interest you will double your money in, let us say, 6 years. To get the answer all you need to do is divide 72 by 6. The answer, in this case, is 12% interest.
The Rule of 72 will give you a rough guide on how much to save and invest for your retirement.