Making Money . . . On Money

“Jake” isn’t my client yet, but the odds are he will be soon. He is the son of one of my clients, who have always been good savers. Jake’s a pretty smart kid; he is 23 years old and a recent college graduate. He landed a pretty good job as an applications developer working for a large biotechnology company in Cambridge. While Jake earns a pretty good wage, with student loan repayments and the high cost of city living, Jake’s claim is that he is not able to save much. But he hears his parents talking about the discussions we have had over the years regarding the importance of building a financial system, so he wants to get started.

 

Hmmm…the apple does not fall far from the tree, as my grandmother used to say.

 

NerdWallet has done some useful math for us. Its analysis says that a 25-year-old making the median annual income in the United States of $40,456, who sets aside 15 percent of their income, will have $4.57 million by the time they’re 65 [1].

 

Of course, I get that it’s hard to come up with 15 percent of your income in savings when you’re juggling credit card debt, student loans, a car payment, and in Jake’s case, beer money.  But, heck, every little bit of savings helps, right?

 

I started my conversation with Jake explaining a simple concept: Compound interest. Einstein – a physicist, mind you, not a financier – even chimed in on the power of compound interest, saying “Compound interest is what happens when you reinvest interest earned on money instead of paying it out – you earn money on the money you’ve already saved. I went on to explain to Jake the classic “rice and chessboard” story. According to legend, an ancient ruler of India challenged a traveling wise man to a chess match, with the prize any reward the wise man could name. The wise man beat him and asked for his reward.

 

“Put just one grain of rice on the first square of this chessboard, sire,” said the wise man. “And double the grains of rice on each square of the board.”

 

So, the first square had one grain of rice, the next two, the next four, and so on. By the time they had reached the end of the board, the rice had filled the palace and far beyond. (In fact, if this really had happened, the entire country of India would have been buried in more than a yard of rice.)

 

While this old fable illustrates exponential growth, it may not be something you’re likely to see with any investment. But the point I made to Jake, and I will make to you, is to make your money work smarter for you.

 

Be vigilant and stay alert, because like Jake, if you’re just getting started you deserve a lot more.

 

Have a great week!

 

Jeff Cutter, CPA, PFS is President at Cutter Financial Group, LLC, with offices is Falmouth, Plymouth, and Mansfield. Cutter Financial Group provides private wealth and investment management advice incorporating low risk, low volatility financial strategies.  Jeff can be reached at jeff@cutterfinancialgroup.com.

 

Cutter Financial Group LLC (“Cutter Financial”) is a registered investment advisor.

 

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1. http://tinyurl.com/yalkef8n

 

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