27 Apr The Power of Compounding, Budgeting and a Line of Credit
Rarely is it the big events that make have the biggest impact on our lives. Instead, it’s the small actions that we take that make the biggest difference. A single event doesn’t seem to make a difference; however, the same small event repeated over and over again does make a big difference.
I call it consistent persistence. Another name for it is mindfulness. Small changes DO make a big difference – either for us or against us. The choice is ours.
Let’s Create Our Example
Let’s create an example. Suppose your take home pay is $5,025 each month and you plan on receiving a two percent raise each year. This is a little more than $100 in your pocket each month. You have $1,000 left after you pay all your bills. This is your positive cash flow. You’ve saved four months of expenses totaling $16,100. You are saving 30 percent of each month’s positive cash flow. Lastly, your have a $240,300 5.5 percent mortgage that you’ve had since May 2009.
Impact of Saving a Percentage of Your Annual Raise
How much of your raise should you save each year for realizing your future dreams?
Let’s assume that over the next fifteen years, you’ll earn six percent on your savings. Let’s look at the combined effect of consistently directing your dollars where you want them to go and using a line of credit by putting our dollars to work 24/7.
If you didn’t spend 25% of each year’s increase in income, in fifteen years your savings would total $205,300. Your mortgage would be paid in full in November 2024 – fifteen years early.
Not bad! What happens if you didn’t spend 35% of each year’s raise? Your mortgage is paid off two months earlier and your savings will total approximately $218,100. Saving just $10 more each month in the first year resulted in your saving an additional $13,000.
This illustrates the power of compounding and keeping your dollars working for you.
Let’s be more aggressive. Assume you hold on to fifty percent of each month’s raise. Your savings jumps to $240,300 and you knock another four months off the payoff date of your mortgage. Boosting the amount you save from 25 to 50 percent has increased your savings balance by $35,000!
Your first year you started chose not to spend $25 of your monthly raise. It didn’t seem like much.
I hope this seemingly small commitment has encouraged you and given you a newfound determination. Your line of credit has enabled you to use the bank’s money and to keep your income working for you all month long. When correctly used, a line of credit is a powerful financial tool that can be used to work in your favor.
Use Your Line of Credit to Your Benefit!
Small changes truly do bring big results!
Step out from the crowd and be different. Be like most large corporations who know that cash is king. It’s not hard to do. Stay focused on your dreams and mindfully spend each hard earned dollar that you’ve earned.
Ready to start your journey towards financial freedom? Get started today!
I’d love to hear from you. Please send your questions, topics or suggestions to firstname.lastname@example.org. You can also follow me on twitter at cash_map.