In order to build your financial house, you need money, but do you know how money works? 

Understanding how money works is the foundation to making money work for you. 

Have you ever heard of the Rule of 72, otherwise known as the law of compounding interest?  Basically, you take the number 72 divided by the interest rate and that will let you know approximately when your investments or debts will double. 

As you can see, the difference of even one or two percents can be pretty significant.  Just take a look at the interest rate on your credit card, student loans, savings account, 401(k), IRA…whatever you can find with an interest rate attached to it.  Either you are making money off of them, or they are making money off of you.  I hope it's the first ...

Where can you get 4, 8, or 12%?  A bank’s savings or money market account can give you about 4% annual percentage rate (APR), though I know many banks that offer much less in return.  In a moderate investment account, based on the stock market's performance in the past 20 years, your long-term investments would expect to earn an 8% APR.  Some riskier investment vehicles performed at around 12% APR or more.  Hey, past performance does not guarantee future performance, OK?  Just like a car, the slower the speed, the less accident-prone; the faster the speed, the more accident-prone.

Let me elaborate (because some of my readers have asked me to)...

Say you have $1,000 saved in a savings account in the bank.  That bank is giving you 4% per year for keeping your money in their safekeeping.  To calculate your anticipated earnings for the year, you multiply $1,000 by .04, which will equal $40.  Add that $40 onto your $1,000 and that will be your cash value.   At the end of the year, your bank statement should show that you indeed have a cash value of $1,040.  If you keep $1,040 in there for one more year, your anticipated earnings for the second year would be $1,040 x .04, which is $41.60.  At the end of the second year, your bank statement should show a cash value of $1,081.60.  Keep doing that for a total of 18 years and $1,000 will become ~$2,000. 

I haven't seen anyone retire rich from putting their money in the bank.  If you're not getting a return of at least 4% per year, you're not progressing at all.  Because for every dollar you make, at least 25 cents go to taxes.  And after that, inflation decreases your entire net worth at an average of 3.5% per year (your $100 is worth $97 next year and $94 the year after next, etc.) 

So what is 72 divided by zero?  Infinity.  What if your tax bracket is higher?  Your net earnings would be in the negative!  And ladies and gentleman, what is 72 divided by a negative number?  Then how many years will it take for your savings to double?!?!  Negative infinity?  

Don’t underestimate compounding power.  It is this understanding of leveraging money to make money that can help you achieve many of your financial goals.  In knowing what it takes to achieve your goal, you can more clearly define your goal and develop a better plan.

P.S.  You can find more information on the Rule of 72 on the Internet.  Some websites, such as Monkey Chimp, even offer you a convenient calculator.   www.moneychimp.com/features/rule72.htm.   You can go to www.bankrate.com to look at current rates.  The point is, use it to speed up your savings and to pay off your debts faster.  

No matter at what point you are in respect to the X-Curve, your financial blueprint should address the following points: