Office of Enrollment Management

Savings and Retirement

Saving for the Future

In order to gain financial security, you must save and invest.  Even saving the smallest amount leads you toward financial success.  You should commit to putting a certain amount of each paycheck into a savings account.  Paying yourself first will help you achieve in financial wellness. With online and mobile banking, it’s easy to keep track and automate your savings.  Plan, set goals, and achieve them.

There are both short-term and long-term savings goals. Saving for retirement is a long-term goal while saving for a new car or down payment on a home are short-term savings goals. Having an emergency fund is a necessary part of well-rounded financial plan.  An emergency fund provides a hedge of protection around you when an emergency comes up, such as an unexpected long-term illness or car crash.

With investments, you must consider opportunity cost, time and the importance of compound interest. A reoccurring theme in personal finance is choice. 

Opportunity Cost

Opportunity cost comes down to choice.  If you have $20 to use with a free afternoon with two choices, the alternative not chosen is the opportunity lost. The time and money are no longer available. You have the ability to decide what is best for you.

Time

Time is a key component to savings and retirement.  The longer you can invest, the more you are able to increase the income potential of the investment. If you are only able to invest for a short time, you should be more conservative.  If you are investing for something in the near future, you want to be sure there is not much risk involved.  You don’t want to lose your principle investment.  On the other hand, for retirement, you have longer to invest and more time to make up for potential losses.

Compound Interest

Compound interest is when you begin to earn interest on the interest earned. Compound interest can work for or against you. Debt with compounding interest works against you while investing with compound interest works for you.   

For example, if you invest $1000 with a rate of return of 10% in one year, you'd make $100.  Add the interest to the principal(original amount) for the following year. You would then earn interest on the new principal. It is like a snowball that starts off small, but as you roll it becomes larger each year. 

Year 1: $1000 + $100 = $1100

Year 2: 1100 + $110 = $1210

Year 3: 1210 + $121 = 1331

Year 30: $15838.9 + $1586.30 = $17449.4

Note that in this example you only contributed $1000 and never added any additional money.  Consider how automated monthly contributions would impact the growth over time. Use compound interest as part of your savings and retirement plan.

Calculate compound interest on your investments. 

Rule of 72

Often people want to know how long it will take to double their money. The rule of 72 helps to provide this estimate. To use this rule, you must know the rate of return. 72 divided by the rate of return gives you the approximate years it will take to double your investment.

Using the example above, 72 divided 10% means that the $1000 investment would double in 7.2 years. 

Calculate how long it would take to double the investment.