My hiatus has been due to a number of factors: a close friend’s wife went overseas leaving us more time to drink beer; I’ve had the flu; been on holidays; had a busy period at work; the football season has started amongst a host of other bad reasons.

I could choose to get down in the dumps about it and just stop updating my site but I would then miss out on all of the positive things this site has given me. Better late than never, I say. Oddly enough, the break confirms again for me what a wonderful hobby blogging is – if I’d bought a brand new fishing boat in a fit of consumerist madness back in September instead of starting this blog, can you imagine how much I’d be kicking myself if I lost the drive to get out on the boat?

If I do permanently decide that blogging isn’t for me then I’ve lost absolutely nothing at all. After taking out the modest costs of hosting and domain registration, I’ve come out considerably ahead in my short time blogging having made some money from adsense, bluehost, Amazon and the like. All the time spent updating the site hasn’t been wasted either, because it has provided me with a real sense of accountability – the idea that people are reading about my progress is extremely good motivation to stay the course with my financial independence goals.

Speaking of advertising revenue. Something odd happened when I stopped updating my site. My advertising revenue went through the roof. I have no idea why, but I’ve made 100 times more in the month without updates than I did in the previous months slaving away writing new articles. Hopefully I don’t jinx things by writing this!

My motivation for updating might have temporarily waned, but my motivation for financial independence and frugality hasn’t. I do think that being away from the site has caused me to think through my purchases a little less though. Hopefully the knowledge that I have to update my site causes me to get back on track. I certainly haven’t been profligate, but I’ve just had less cause to think about the best frugal option in all circumstances like I used to previously.

This weekend I’m going to do my March report, and I expect spending to be up slightly, but nothing too dramatic. See you then!

The post I’ve been slack for too long appeared first on Free in Ten Years.

My recent post about my top 100 cheap hobby suggestions has been fairly successful, and has inspired me to post this follow up article about one of the suggestions that has been occupying much of my time of the last six months: blogging.

My post about cheap hobbies has quickly become the most popular way for people to get to my site through Google. If you search for ‘cheap hobbies’ in Google, it’s currently the first or second result you get (at least it is for me, and is confirmed by Google Analytics).

Blogging has most of the hallmarks of a good frugal hobby. If you have a computer and an internet connection then you can start a blog. There are a number of free services that let you host your blog on their hosting, like blogger, tumblr and wordpress. They are fine if you’re starting out and have no plans to advertise, but can be more limiting if you want your own domain name and have complete control over what is on your site.

Given how cheap domain registration and hosting is, it’s definitely worth considering hosting your own blog so that you can control every last aspect of your site. A typical .com domain name costs around $10 per year, and hosting can be had for as little as $7 per month with perks like unlimited domain names, unlimited data transfer and unlimited data storage.

The best hosting currently available is bluehost. There are a few similar hosts, but none that make the process of setting up your blog as easy as bluehost does. WordPress is the most popular option for blogging software if you want to go down the self-hosted path, and for good reason. It’s extremely flexible and customization - there are tons of free and professionally built themes to choose from, and updating is really easy.

If you decide to register with bluehost, please consider using one of my links because it directly assists my blog financially when you sign up through my site. The best part is that it won’t cost you any more to sign up through this site.

I have been running my site for about six months and haven’t been directly thinking about how to make money from it until fairly recently – I dabbled in the beginning with adsense, but only recently have I thought about different revenue streams. It’s certainly not a good way to make a lot of money quickly, but all of the costs I’ve had to run the site (domain registration, hosting, and the like) has been returned in revenue by more than double through advertising income.

At worst, it’s a cost neutral hobby that has the potential to return some income if you stick with it, or stumble upon a popular format.

Positives to blogging as a cheap hobby

1. The ongoing costs are no more than about $100 per year for a fully hosted site with your own unique domain name. If you don’t care about being on your own domain name, it is a free hobby.
2. It’s a great way to learn more about a passion or hobby in another area. For me, I’ve learned a lot about financial independence and personal finance and probably wouldn’t have learned the same lessons as quickly had I not been constantly thinking about how I could write about a particular topic
3. It keep you accountable. If you’re interested in a blog to document your progress towards a particular goal, like I am as I move towards financial independence, the feedback you get from readers is invaluable as a source of motivation. More than half a dozen times, I’ve reconsidered a purchase because I didn’t want to include it in my monthly reports.
4. It can lead to a relatively passive income stream. I generally don’t like referring to blogs as being capable of producing ‘passive income’ because by and large they are a lot of work to maintain and update – but they are less intensive compared to a full time job, and you can go at your own pace. Theoretically, you could build a site and then let it run on auto-pilot, while continuing to receive a small amount from adsense into the future - or hire someone else to write for you. Generally, they take quite a bit of active participation to get them to a point where they regularly provide any income at all.
5. You can remain anonymous.
6. You can update your blog from anywhere in the world, and unlike another hobby or job, you’re not tied to the one physical location.
7. You can run more than one site without them being connected, and the loss is minimal if any one site doesn’t work out.
8. You meet a great number of very passionate people who have similar interests, and particularly in the personal finance niche, there is a real sense of camaraderie.
9. You can say whatever you like about whatever subject you like, and if you do so for long enough, you’re bound to find a group of like minded people and readers. The internet is a weird and wonderful (and huge) place, and if you’re persistent and entertaining, your blog can be a success almost regardless of its focus.
10. Be your own boss. Only you edit your work, choose when you write and what you say. I’ve found it to be a very motivating and liberating process.
11. You gain a number of very transferable skills, like copy-writing, editing and marketing.

The negatives

1. It takes considerable effort to regularly update a blog. In February, I found it hard to work a full time job, run this blog and do all the other things I want to do in my spare time.
2. Pressure to keep writing
3. Minimal profit early, potentially for ever
4. Can be disheartening to not get any feedback
5. Difficult to know if you’re on the right path

If you think you’d like to write regularly about a topic you’re passionate about and think it’d help you stick to your goals – try writing a blog. It can be really cathartic, and doesn’t have to cost anything if you’re not sure you’d like it. If you start the next Get Rich Slowly, then you could retire in a few years, too!

The post Cheap hobbies: running a blog appeared first on Free in Ten Years.

It feels very strange to be writing a report about February already. It feels like 2013 only just started last week. My partner and I both had birthdays in February which has made it a fairly expensive month – without the additional spending on birthdays we would have had another very good month from a savings rate perspective.

This month I felt the pressure of failing to meet some of the goals I set for myself last year. I am way behind on my reading, I haven’t been running and I’m feeling less inclined to update my blog that normal. I’m confident that it’ll pass – I’ve had a pretty busy month at work which has meant that some of my other pursuits were put on the back-burner for a while. Never mind.

I’m excited about my next DIY project for March which is to create a home gym to get back into the swing of fitness. Rather than fork out an exorbitant monthly fee for a gym, only to use a few pieces of weights equipment, I’m going to be making my own for the shed.  I’m going to build a power cage from wood to do squats, bench press, dead lifts and a heap of other exercises that I haven’t done for ages. I’m going to be using this design.

Judging from past experience, getting back into weights will help my motivation and mood in all other areas, so it should be worth the investment. All up I should have a fully functional gym with a bench, barbell, dumbbells, weights, punching bag, mats, dipping machine, pull up bar and power cage for about $500. Well under what I could buy it for locally.

The finances

This was our first full month as index fund investors. We continued to add regularly to our fund and it went up a whopping 3.5%, which is very handy indeed over one calendar month (particularly a short one). We aren’t expecting it to do this regularly, but it’s nice to get some immediate positive feedback. During the down months we just have to remember that by continuing to contribute regularly, that we’re buying shares on sale and are getting more units for our money.

Our spending was up because of birthdays, but we both got gifts we were very happy with!

February’s financial charts

Every month I include our financial charts as a way of keeping accountable and on track. I’m not here to be boastful or to show off which is why I keep the dollar figures out – I like to see trends rather than absolute figures. I do it to see we are going in the right direction, not that we’re earning more or less than the next person. So, here they are for February!

Blog

The blog was fairly quiet this month because work was busier than normal. The good news was that I had more visitors than ever, and all of the numbers are heading in the right direction. I received a fairly big payment for hosting an advertisement which was a nice and unexpected surprise. For those wanting to advertise, please get in contact with me here.

I am finding it a bit hard to find the time to update as much as I’d like to, so I’ve settled on trying to update on Wednesdays and Sundays, to make sure I’m doing it regularly and not making excuses. Any additional updates will be a bonus – but I’m setting the bar a little lower for myself for the next few months. This project was designed to be enjoyable, after all!

My alexa rank dropped a bit this month which is probably due to me spending a bit less time on the site. Alexa uses data from people using their plugin on their browser, so it doesn’t rank all data – because I spend more time on my own site than anyone else, I’m probably over represented in the data a little bit. Because I spent less time on the site, I think my rank dropped a little. Not concerned in the least – my eye is on the very long term.

The post Monthly report: February 2013 appeared first on Free in Ten Years.

We now have three separate vegetable gardens, two that are fenced to protect our produce from rabbits and a raised bed for herbs. The cost of fencing and wood for our raised bed would be less than $200 and will last for a long time.

Before

After

We have harvested about 30kg of tomatoes in the last month, two large pumpkins, bok choy, more beans than you could eat in a lifetime and lots of different varieties of chilies  We have probably harvested about $100 of vegetables so far.

In order to avoid wasting our massive glut of tomatoes we have made massive batches of chutneys, sauces and have given many kilos away at work. My co-workers keep commenting about how much better our tomatoes are than store bought tomatoes – and have been bringing in their own excess fruit and vegetables which has been really cool.

I’ve written many times about the benefits of swapping expensive hobbies with cheap hobbies, and our vegetable garden is a good example. Even if we hadn’t got any food from our garden, it would still have been an enjoyable exercise – we get outside, we spend time together, and we get considerable satisfaction from watching our hard work come to fruition slowly over many months. The long term nature of the pay off makes it particularly satisfying.

We could have spent the last few months playing xbox, and buying new games, but that’s an expensive and comparatively less satisfying, social and rewarding option. I’ve not regretted once the decision to sell the xbox. Don’t get me wrong, I had fun playing it, but I’m having considerably more fun doing other things.

Overall, I can see us gardening in some form or another for ever. It may be that one day we’re living in an apartment rather than in a house by the sea, but we’ll always find room to fit in a small herb garden or raised bed I think. It is a great way to reduce the grocery bill and is surprisingly fun.

The post Vegetable garden update appeared first on Free in Ten Years.

The advice is to have up to six months of living expenses in liquid savings that can be accessed immediately. Most argue that you shouldn’t rely on credit cards or other lines of credit for an emergency fund because it can cause a spiral into debt and that it teaches bad habits.

The above is not necessarily bad advice, but it’s the ubiquitous nature of it that I disagree with. This is not a good plan for everyone, and in a lot of ways it’s not even good for the average person, if there is such a thing.

Many of the advocates of the six month emergency fund argue that you need a liquid fund that big because of the danger of unemployment in a poor economic climate. What if you can’t find a new job straight away?

You don’t need such a big emergency fund

There are a number of reasons why I think you don’t necessarily need such a conservative emergency fund.

1. Why base an emergency fund on your typical living expenses? In my view your emergency fund should be based around emergency spending levels, not typical spending levels. You won’t be going out to dinner, buying consumer goods or taking holidays if you lose your job. We should be budgeting for much less in our emergency fund.
2. There is a large opportunity cost associated with having such a large amount of money sitting in a bank account not earning interest. For every month you’re not in emergency mode (ie 99.9% of the time) you give up income that the money could be making if it were invested elsewhere, or applied to a debt like a mortgage.
3. An emergency fund doesn’t need to be so big or so liquid. An emergency like losing your job happens over a period of months, which is plenty of time to release money from a less liquid account like an investment account, brokerage account, or mortgage.
4. Credit can be a useful instrument in case of an emergency until money is released from less liquid investments – credit doesn’t have to be evil, and can be used effectively to your advantage.

To expand on the opportunity cost point – compare the two scenarios.

Case A: Typical emergency fund

You have a $20,000 emergency fund sitting in a highly liquid standard bank account.

Case B: Hybrid emergency fund

You have a $2,000 mini emergency fund in a highly liquid bank account, a $3,000 credit card with no annual fee, and $18,000 in low cost index funds ear-marked specifically for emergencies.

The hybrid emergency fund breaks most of the rules that are commonly advocated as I explained above. It isn’t liquid enough for most according to traditional wisdom and relies in part on debt.

The cost of having all of your emergency fund in liquid assets is about $90 per month, assuming you’re giving up $18,000 per year at 6%. That is, in normal, non-emergency times, the cost of the liquidity in your emergency fund is high.

The hybrid model is advantageous in many cases because while there is less liquidity, there is sufficient liquidity in cash and lines of credit to get through the first week or two of almost all emergency situations, so that the less liquid investment or asset can be drawn on.

Personal circumstances to consider

Consider having more months worth of emergency expenses in a more liquid emergency fund if any of the following apply to you:

1. A wildly variable budget
2. Are self-employed, a seasonal worker, or at risk of losing your job
3. Have children or non-working dependants
4. Have a low tolerance to risk
5. Can’t redraw on your mortgage
6. Have a unique emergency on the horizon
7. Live in the USA, Iran or North Korea or anywhere without universal health care

Consider having fewer months and a lower proportion of liquidity if you:

1. Are in a relationship with another income earner
2. Are a full-time worker in reliable employment
3. Have no children or dependants
4. Have a higher tolerance to risk
5. Have a predictable and regular budget
6. Can redraw on your mortgage
7. Live in a country with universal health-care

Don’t believe me though – challenge me and the traditional wisdom when you’re looking at your situation. Don’t trudge through the next decade trying to save half a years worth of expenses unless you’ve got a compelling reason do to so. Instead, consider saving a mini-emergency fund, establishing an emergency credit card (only for use in emergencies, where it’s able to be paid in full within a week or two) and then applying your money to pay down debt and build assets.

Just make sure you earmark some of those assets for emergencies and have a plan to access them in case shit hits the fan. If you can’t guarantee you’ll be able to access it in 14 days, it’s probably not liquid enough in my view. But there is absolutely no need in most cases to have the full emergency fund in cash as is often recommended.

If you have a large emergency fund sitting under the mattress or in a 0% bank account, you should consider moving it somewhere more profitable.

The post Challenging the typical emergency fund appeared first on Free in Ten Years.

Of course increasing your income is great, and if your boss approaches you this week to talk to you about a pay rise, don’t tell her “I’m really sorry boss, but I’m working on reducing my spending at the moment!” Of course it’s always preferable to increase your income.

Increasing your income outside your normal source of work comes with some important drawbacks:

1. You need to spend additional time learning new skills and running your side business
2. You are taxed on any additional income
3. Typically, expenses increase to meet the new income level

The net result is more stuff and less time. 

On the other hand, decreasing your spending has a number of positive benefits that increasing your income doesn’t have:

1. No additional time cost
2. Savings are like tax free dividends
3. Reducing spending permanently reduces the amount needed to become financially independent, because a smaller nest egg will sustain a simpler retirement

The net result is less stuff and more time.

If you can do both, you should.

People who work for themselves can normally more easily increase income than someone who is working for a fixed salary. Every situation is unique and there will occasionally be opportunities to earn extra income with minimal effort required – though these are few and far between in my experience.

Spending rate and time to financial independence

I think the best example of how increasing your savings rate is preferable to increasing income is it’s impact on time to retirement or financial independence.

What I’m about to say is incredibly obvious, but it’s worth saying so it sinks in properly: If you spend all of your income you will never have any money to retire on, early or otherwise.

If you require nothing to live on, and were able to live a completely self-sustaining existence off the grid, then you wouldn’t need to work and would be, by definition, financially independent from the need to work.

The impact of savings rates on time to financial independence

• At a savings rate of 10%, it takes just under 52 years to accumulate enough money to retire.
• At a savings rate of 90%, it takes less than three.

For all of the more normal and attractive options in the middle, see the following chart taken from Early Retirement Extreme by Jacob Fisker.

A nest egg that is the equivalent to 30 years of living expenses is often cited as inexhaustible if you assume a 4% savings rate.

The trinity study is the best place to go to read more about why this is so, abd be sure to have a look at firecalc.

Last month we almost achieved a 25% spending rate which was a pretty great achievement. We both work in jobs which will see steady increases in income over the next 10 years. The real challenge will be to keep spending flat to avoid lifestyle inflation. This will hopefully drive our savings rate lower and lower as the years progress.

To have achieved 25% for a month in our first year as home owners and at the beginning of our professional careers has been a good achievement. But like with many things, my eye is on the long term – I’m hopeful we can achieve 25% over a long period like 10 years – it should get easier as the years go on because our spending will be more or less constant from here on while our income grows naturally.

If you’re interested in calculating how long it’ll take you to reach a point where you could retire if you chose to, visit Networthify,com’s early retirement calculator. It’s really good.

The post Reduce spending and time to financial independence appeared first on Free in Ten Years.

In January, we only ate the food pictured above.

Last month I set the challenge for us to spend nothing on food in January. It was one of those dares that my partner and I discussed jokingly, but the more we thought about, the more we thought we could do it.

We had a fairly well stocked pantry, with plenty of pasta and rice, lots of potatoes, oats, spices, tuna, oil, and many other little items that don’t go off. The picture above is a portion of the food that we had available to us for the month.

We were also lucky enough to start to have food from the garden – tomatoes, beans and pumpkins started to become plentiful.

The rules

1. No takeaway
2. No restaurants
3. No grocery shopping
4. No alcohol
5. Garden supplies and seedlings for the garden are OK

How we spent nothing on food

We ate very simple food based around rice and pasta. We largely at the same meal for all lunches at work, which is one of our favourites: rice and tuna. It’s delicious, and we had just about enough to get us through the whole month.

For almost a whole week, our dinner was pesto and pasta. I got pretty sick of it by the end of the month, but it was a fun challenge. Mostly though, it was almost like we weren’t really eating any differently to our normal diet. It was very simple, home-cooked yummy food. We were lucky enough to go away fishing and caught a lot of flat-head  which gave us some much needed variety towards the end of January.

Why deprive ourselves?

We didn’t have to do this to pay the bills or because we’re in debt. I would hate to be in the position to have to do something like this. I wanted to do it to see if I could. Like going without hot water for a month, I just wanted to see if I could do it.

It turns out that it was fairly easy in the end. I’m not going to rush into doing it again, but it has certainly made me realize that there is almost always something you can cook with things you already have at home.

It also meant that we threw out almost no food all month because we simply couldn’t afford to. All our vegetables were used before they went off, either by freezing them, turning them into chutneys and sauces or by adding them into our meals.

We saved a few hundred dollars – even though our month mostly just delayed spending rather than producing outright savings – it did lead to actual savings. We ate more simply than normal so we ate staples and cheaper food, without much meat at all. If we’d gone to the grocery shop we would have eaten more expensive food just because we would have bought what we felt like on the day.

It taught us to cook a few new dishes, like my vegetable patties, which used the food we already had. Supercook.com is an awesome site that is worth looking into – it helps you find recipes based on the ingredients you already have. 

Our expenses for January

missing something?

Conclusion

I’m not going to rush to do this again, but it was pretty nice not spending anything on food. We have learned quite a few new recipes and get to restock the pantry based on foods we have been looking forward to all month.

I’m not sure what I’m going to go without next, but I’m leaning towards television. With the AFL season just around the corner, it’s not going to be easy, but I reckon I can do it.

The post How we spent nothing on food in January appeared first on Free in Ten Years.

This post is part of a series featuring meals that you can make for a dollar or less. They have to be delicious, easy to make, keep well, nutritious and not rely on specials or other tricks.

This is such a great frugal meal.

It’s great because you can skip over all of the work if you have left over mashed potato. It’s also great because it’s really easy to make and is absolutely delicious. I guarantee you’ll make it again if you try it!

You can use any vegetables you have lying around and if you’ve read any of my articles, you’ll know I’m a fan of using up food instead of throwing it out and letting it go to waste.

Ingredients

• Potato (five large) – 50c
• Carrot (one large) – 5c
• Corn (half a cup of kernels) – 30c
• Zucchini (one medium) – 40c
• Butter (tablespoon) – 10c
• Milk (half a cup) – 10c
• Salt (to taste) - negligible
• Oil - negligible

Serves – 4
Total cost –  $1.45
Cost per serve – $0.36!

Method

1. Boil the potatoes for 20 minutes in a medium sized pot while you chop the vegetables into small pieces. Have a glass of wine. 
2. In the last few minutes of boiling the potatoes, put the vegetables into the pot to cook them briefly.
3. Drain the vegetables, but leave the potatoes in the pot.
4. Take the pot off the heat.
5. Add the butter and milk to the pot with the potatoes and mash. Not a bad time to add a little bit of salt.
6. Add the vegetables back in and stir through.
7. Make little patties and fry them in oil in a hot pan until golden brown.

Variations

You could add any vegetables you have in the house, spices, or cheese. They are great by themselves or with a simple salad. I like them in a sandwich with some BBQ sauce.

They are awesome for breakfast with left over mashed potato with sausages or eggs, but are just as good for work lunches or dinner with a salad. At 36c these are amazingly frugal and delcious.

Give them a go.

The post Dinner for a dollar – Vegetable potato patties appeared first on Free in Ten Years.

Harvest from the garden during January

In January our patience was rewarded with a great crop of tomatoes from our vegetable garden.  We have been eating a ton of beans, parsley, tomatoes and will soon be munching on two of the biggest pumpkins you’ll see.

We crushed our challenge not to drink any alcohol for the month. It was almost too easy, but was still a very good test of will power. There were a few occasions when I was pretty tempted when my work friends went out for after work drinks, but I held strong and my bank balance and liver are better for it.

We also managed to get through the month without spending a cent on groceries, takeaway or restaurants! No money whatsoever was spent on food – I’ll be writing an article about how we did it in the next few days. Let’s just say that our pantry is fully depleted of staples and having a productive vegetable garden helped in a big way.

The finances

As you would expect considering we spent nothing on groceries, alcohol and spent much less than normal on fuel – we had a great month financially.

You can see the big drop off in spending, and a very slow gradual rise in TIR!

I love this graph.

Finding lost superannuation is fun!

Adsense revenue is growing.

Welcome, Vanguard investment account!

Finally moving back in the right direction.

When December rolls out of the three month average, this will look a lot better.

As you can see, we opened a Vanguard investment account so we can invest in a broad range of low cost funds. We are invested in a share market index fund, but will diversify more broadly as time goes on. For now, the one fund provides significant diversification already considering it owns all (for the most part) of the companies in the ASX 300. International shares and bonds are next. Next month I’ll make the portfolio graph clearer to properly indicate that Vanguard = shares. 

I’m really proud of our spending rate which got down to 26% this month! I had aimed to hit 25% personally, but we almost got there as a combined partnership which is awesome.

The blog

It was another good month of growth for my site. As you can see below, the various metrics I track are all up, which is awesome! You guys rock for reading and commenting. Thanks for sharing my articles too, that makes a big difference.

I seem to have been found properly by Google, and I’m receiving a steady flow of traffic to some of my articles now. For some reason, Google loves my article on cutting your own hair. Go figure. Maybe I could turn this into a male hairdressing blog?

I set a goal last month to submit four guest posts, and I did. So far, three have been published and one is scheduled to go up in a few days. The ones that have been published so far are:

1. How to retire in ten years at Eyes on the Dollar. Thanks Kim!
2. An early retirement case study at Young Cheap Living. Thanks Kraig!
3. Why I’m not spending a cent on food in January at Money Life and More. Thanks Lance!

Search engine traffic readers fewer pages per visit, but it’s all travelling in the right direcfion.

If you haven’t subscribed, do it NOW!

Creeping ever lower on the Alexa Rank

Last month’s goals

I didn’t do nearly as much running as I’d hoped to. I didn’t get anywhere near close to my 100km target, and I’m almost too embarrassed to say – I ran 15km. Yuck.

The rest of my goals went well – we spent just over our 25% spending target, and we didn’t buy any food for January. I submitted four articles that were accepted for publication. Nice!

Goals for February

This month looks like it’s going to be really busy at work, so I’m going to make sure I set goals that I can achieve. They are:

1. Run once a week
2. Finish Lord Jim (if it’s the last thing I do)
3. Write more articles than I did this month

Did you have a good month financially last month?

The post Monthly report: January 2013 appeared first on Free in Ten Years.

Compound interest is nothing more than allowing interest to earn interest. If you have $10,000 and earn 8% interest, then you will earn $800 every year. If you withdraw that $800, and leave the initial $10,000 to keep earning interest, then you’ll earn that same $800 every year.

However, if you let that interest become part of the income earning principal, then you will earn interest on the interest you earned in year one. In the second year you’d earn $864.

There is no point at which your investments magically take off – you are still earning the same 8% every year. It’s just that the balance starts to grow rapidly (compared to the original principal) if left to do it’s thing for a while.

Incidentally, some investment types are better set up to take advantage of the power of compound interest. An index fund that reinvests your dividend payments automatically is a great tool for taking advantage of compound interest. On the other hand, a rental property that pays you exactly the same amount every year is not, because you can’t add that money to the value of your house without additional work – and even then, you have to justify a rent rise to your tenant.

Have a look at what happens to the original $10,000 if left to earn interest on interest for 50 years at 8% interest.

As you can see in the graph above, an initial investment of $10,000 earning 8% interest compounding every month will be worth $22,196.40 after ten years – A healthy $12,196.40 gain thanks to interest. Nice!

After the second ten year period, the investment will be worth an awesome $49,268.03 with a massive $39,268.03 interest gain. 

At the end of the 50th year, the initial investment is worth a whopping $538,781.83. Almost exclusively because of interest earned on interest.

Without compound interest – if you just withdrew the $800 income every year – you’d have only earned a comparatively paltry $40,000 in interest.

Think of every dollar that comes into your possession as an employee that is capable of earning money on your behalf. If it’s spent and wasted it is good only for the brief time it’s in your possession. If it’s invested, then it creates more employees that are capable of earning yet more money for you – and so on.

What if we let our $10,000 compound interest experiment go on for a further 50 years, how much would we be left with?

$29,028,541.41.

Not that any one individual can invest over a time frame as long as 100 years, but it shows the amazing power of compound interest even when starting from a low base. The more you can save early on, the longer compound interest has time to do it’s thing.

Get to it!

The post You need to start saving right now! appeared first on Free in Ten Years.