Two Things to be Aware of in Financial Planning
The foundering economy has exposed the weaknesses of our credit-based economy and peaked people's interest in saving money. However, simply sticking some cash in a cookie jar like our grandparents did during the Great Depression is not quite good enough anymore. In order to properly prepare for tough economic times, the money that is saved must be made to work. There are two simple things that someone must know if they are going to have an adequate financial plan for the future.
Finding an investment that compounds interest is very important. Compound interest is when the interest drawn on an investment is applied to the principal. This is a fairly common feature to find in savings accounts, retirement accounts, and pretty much any other account that accumulates interest. The advantage of compound interest is that as your investment capital grows, so does the amount of interest you draw. So, if you deposit $500 and draw 1% interest a month, the following month, the interest will be drawn on $505. The month after the interest will be drawn on $510.05 and so on. While gaining the momentum may seem slow, compound interest is a safe investment plan that allows the interest drawn to increase dramatically over time.
If you're invested in a 401(k), you need to be aware of dollar-cost averaging. When you're paying into a 401(k), a certain amount of money is invested, regardless of the market price. This means that sometimes you're getting more shares and sometimes you're getting less. This is a ratio that should be watched. In cases where you are getting progressively more stock for your money, that means the market is not doing well. However, a rebound in the market could multiply your investment amount dramatically.