Bill Gerhard: Hi! I am Bill Gerhard, Director of Financial Services for AAA. Today I am discussing tips to help you with building a sound saving strategy. Let's talk about reasons to save. A savings plan enables you to prepare for what might happen, such as an emergency, to afford things you want such as education and travel and to avoid things you don't want, such as big tax bills and too little retirement income. Having savings to meet both expenses you can project and emergencies may also allow you to avoid borrowing money and paying interest to a lender. The first step in establishing a plan is to determine much money it will take to reach your goals taking into considerations factors that will affect your finances such as current and future income, debts, tax status and inflation. The one thing that is certain about a savings plan is as soon as you start saving the better. The money you invest in money market accounts, certificates of deposit and individual retirement accounts generates greater income over the time through compounding interest. Compound interest combats the two biggest enemies as savors, rising prices, also known as inflation and taxes. You can quickly estimate the interest your savings earned over the time use the Rule of 72. It will help you determine when you will double your investment. To use the Rule of 72 you need to know two things, one the amount of savings you are investing and two your interest rate. Then divide 72 by the percentage of interest you are earning. For example, let's say you invest $1000 at four and a half percent interest; it would take 18 years to double your money. If you can invest at an interest rate just 1% higher, your interest compounds faster and you double your investment faster; in this case fourteen and a half years.
Let's look at a real world example of how you might save for a major purchase such as a car. Millions of Americans trade in their vehicles every four or five years and finance the purchase of new cars and trucks. Because vehicle loans are typically for at least four years, they pay interest on these loans continuously. If you have a car loan you pay interest on the money you borrow and you loose the opportunity to earn interest on the money you would have put into your savings. Consider a better strategy, pay off your vehicle loan, keep driving that vehicle another five years, invest the amount of your all car payment, by the time vehicle is ten years old, you should have enough cash to purchase a new vehicle out right with no loan and no interest payments.
It is likely you will own several vehicles over time. The savings and investment strategies used to buy those cars can save you tens of thousands of dollars over the lifetime. When you manage your current expenses, so you are able to save towards future expenses, you gain the opportunity to reduce your long term cost of living and improve your overall quality of life. AAA offers the information in this video series for educational purposes only. Carefully consider objectives risks, expenses and tax implications before investing. In our next video we will look at the different types of saving vehicles.