On this Father's Day, let me say how fortunate I have been to have a dad who's pretty good with money and took the time to drill some personal finance basics into my head.
Sure, when I was young I didn't always appreciate that advice from Dad. The Dadvice often came with copies of articles, anecdotal stories and sometimes hand-drawn examples — but it seems it eventually sank in.
So here are some of Dad's favorite lessons:
Start saving early
The combination of time and compound interest is your best friend when it comes to saving for the future. Time allows compound interest to work its magic.
Consider this example from a T. Rowe Price brochure, which says that “someone who saves $100 per month for 10 years in a tax-deferred account and then stops contributing would accumulate more by age 65 than someone who waits 10 years before starting, and then invests $100 per month for the subsequent 33 years.”
Trust me, I know it's hard to save when you're just starting out. When I had my first job out of college, as the editor of a small trade magazine, I had to take a second job waiting tables to keep ahead of my bills. But I tried to save a little each month, and avoided credit card debt.
Saving at a young age isn't easy, but it's important to understand why you should try.
The rule of 72
This handy rule helps explain how compound interest works, and allows you to make rough calculations in your head.
Divide 72 by a rate of return, and you get a pretty accurate idea how many years it would take to double your money. For example, if you earn a modest 7 percent annual return, your money doubles in just over 10 years (72 divided by 7 is 10.3). Over the long term most investment funds earn more than that.
So, set aside $1,000 for retirement when you're 25, and if you get a 7 percent yearly return, you would have $16,000 when you're 66 because it would double four times.
Set aside $1,000 when you're 35, and you end up with half as much at 66, $8,000, because it doubles three times instead of four.
Got a match?
Many employers offer matching funds to employees who make contributions to retirement plans, and those funds should not be passed up. It's nowhere near as good as the pension plans many companies used to offer, but it's still free money.
Maybe the company will put a dollar in your retirement account for every dollar you contribute, up to a limit, or maybe they'll contribute 20 cents on the dollar. Either way, passing that up is like passing up a raise.
Dad helped get me in the habit more than 20 years ago by offering to match small, initial contributions I might make to a retirement account.
At the time, I had little money but I couldn't turn down an offer that good, and I have always made sure to take advantage of matching 401(k) funds at work.
People with modest incomes also can get what amounts to matching funds from the federal government, through the retirement savings tax credit.
The poison of plastic
Credit cards are not bad. Incurring interest charges on credit cards is bad.
Credit cards are designed to allow low monthly payments at high interest rates, potentially stretching out a single purchase into a multiyear loan. Put $1,000 on a credit card with an 18 percent interest rate and pay only the minimum due each month, and it will take eight years to pay that debt and cost $863 in interest charges. And if you're carrying a balance, every additional purchase you make is a high-interest loan, even if it's just a cup of coffee.
Getting a good start with some solid common sense advice about financial planning at home was very helpful to me.
Now that I'm the one giving advice, here in print and at home to my own son, I just wanted to say thanks, Dad. See, I was listening.
Reach David Slade at 937-5552 or Twitter @DSladeNews.