How much do you know about finance?

Each time financial surveys are published, I astonished at the results. These surveys are not new but, reading some books on economic history, they have left me amazed:

According to a 2007 survey in the United States:

• Almost a third (29%) of respondents said they had no idea what the interest rate on your card was.

• Another 30% said it was less than 10%, when in fact the vast majority of cards have interest rates well above 10 percent.

• The 50% of respondents said that they had learn nothing or not too much about finance at university

A 2008 survey revealed that:

• Two-thirds of Americans ( 66.6% ) do not understand how compound interest works

In a survey conducted by a group of graduate students from School of Business at the University of Buffalo:

• Only 14% understood that equities would outperform bonds in  more than 18 years.
• The 59%t did not know the difference between a private retirement plan, the Social Security pension and a pension plan.

But it does not only happen in the U.S., in 2006, the British Financial Services Authority conducted a survey which revealed that:

• One out of five respondents had no idea what would be the effect on the purchasing power of their savings if inflation rate were 5% and an interest rate were 3%.
• One out of ten did not know which was the best discount for a TV which cost £ 250: if £30 or 10%.

And you, how much do you know about finance?

Who wants to be a millionaire?

Normally, we associate to become a millionaire through the lottery. Few gambling games make you millionaire overnight and the odds  are very small.
 

However, the possibility of reaching one million dollars ( $ 1,000,000) through our savings is not as unattainable as we think. A regular savings can become millionaires someday. Of course, depends on three things:

• The age at which we start to save
• The amount we save periodically
• The return we get

This graph shows the monthly effort we should do if we are to $ 1,000,000 at age 65 depending on how we start to save:

* Average return on equity expected 7%

* Average return on deposits expected 3%

* The calculations do not take into account the inflation effect

Monthly savings needed to get 1 million dollars to 65 years depending on the age at which we start saving :

Get 1 million dollars is possible but involves a considerable effort, especially when we start to save.

If you are 25 years old , $ 381 monthly savings can be almost impossible, but think that if you started to work, you probably have few expenses. As time passes, the effort is reduced: 

• At 35 the same amount is equivalent to $ 268 / month from now, 
• At 45 amount to $ 189 / month from now
• At 55 amount to $ 133  / month from now

 * Estimated inflation of 3.5%

Another way to reduce the effort is whether we have saved a certain amount . For someone who had already saved $ 20,000. Savings per month that is needed to get 1 million euros would be:

 

Who Wants To Be A Millionaire?

How to allocate savings

Once we are clear that saving is important, it's time to get down to work and deliver savings. It is important to remember that the money we save is to spend at different times in our lives, which will allow us to save is to spend without reducing our standard of living.

The first step we must take is, if we have not already done so, save for unforeseen or unexpected expenses (eg car repair, purchase of appliances for damage, home repair, etc ...). It is what we call SHORT-TERM savings. Such savings will allow us to basically two things: