With the Fourth of July behind us, we reflect on our founding fathers and what the Declaration of Independence meant in the past and now. But what about savings techniques used by our founding fathers that can be used now? Ginita Wall shares savings tips adopted by one of our founding fathers that still works today.
Do you know who said “A penny saved is a penny earned”? It was Benjamin Franklin, one of our founding fathers, who was a very savvy guy. Though his saying was just about pennies, he proved that pennies can grow to be worth millions. Here’s how.
When he died, Franklin left the cities of Boston and Philadelphia 1,000 pounds each – that’s the equivalent of $4,444 today. But he didn’t let the cities spend the money right away.
Instead, he asked that the funds be deposited to gather interest over the next 200 years, though some could be used for loans to young craftsmen to help them get established in their trades.
Benjamin Franklin knew about the power of compounding, and how savings could grow.
We can use his wise techniques to harness that power to our advantage. Although most of us don’t have 200 years to make our money grow, if we are investing for long-term goals, diligent saving and compounding can really make a difference.
If you invest your money to earn interest or a rate of return, it will grow over time. How much it will grow can be measured using the Rule of 72. Here’s how the Rule of 72 works. Let’s say you are investing your money to earn 3% a year. Divide 72 by that 3% you are earning on your money, and you get 24.
That’s how long it will take for your money to double. The same trick works to figure out how long it will take your money to triple using the Rule of 115. Take 115, divide it by your 3% interest rate, and you’ll find that it takes 38 years for it to triple.
If you want your money to grow faster, you’ll have to take a bit more risk by investing in stocks and bonds. So if you have a portfolio of investments, maybe in an IRA, that is earning an average of 8% a year, dividing 72 by 8% you’ll find that your money will double in only 9 years. And the longer you leave your money invested, the longer it keeps doubling.
For example, if you have $10,000 invested that is earning 8%, it will double to become $20,000 in 9 years, and 9 years later you’ll have $40,000, then $80,000, then $160,000. The longer your money is left to grow, the better off you’ll be.
The power of compounding paid off for both Philadelphia and Boston. Philadelphia took to heart Franklin’s wish that the money be loaned to individuals, and over the 200 years it loaned the funds to hundreds of individuals at low interest rates. By 1993, the 200 years were up. The original $4,444 Ben Franklin left to Philadelphia had grown to be $2.25 million. That’s a lot of growth, but Boston did even better.
Boston invested the money into higher earning investments and just let it grow in the trust fund year after year, compounding the earnings. Franklin’s Boston’s trust fund, which had focused on getting high returns, had grown to almost $5 million, more than twice the amount in the Philadelphia trust fund.
Where is the money now? Boston ultimately used the money to fund the Franklin Institute of Boston, while Philadelphia’s funds are now used to assist recent graduates of Philadelphia high schools who wished to pursue careers in trades, crafts and applied sciences.
Ben Franklin’s saying about a penny saved is well-known. But by his legacy he proved the worth of another of his lesser known sayings: “The use of money is all the advantage there is in having it.”