One of my main struggles is my penchant for eating out way way too much.  In fact, if there was one thing I could do to cut costs it would be to cut back on the amount that I eat out.  At one point I had a “thousand dollar month” of eating out.  This actually is fairly common for people who eat out a lot.  

 My favorite restaurant by far is the Melting Pot.  Now, unfortunately its also one of the most expensive places in town, and the thing I like there, is the most expensive dish.  Lobster tail is quite frankly one of the best foods on earth, ever.  In any case I did a price comparison comparing the last time I ate there, versus how much the same meal would have cost to make at home.  It goes a little something like this

Does that mean I am going to stop going there?  Quite frankly, no.  There are a lot of intangibles about going there….the atmosphere, all the different sauces they give you, and how my girlfriend eats the chicken and I get the lobster tail mmmm.  But the point is that it is a LOT cheaper to eat the same foods if you cook it yourself…and you can save a ton of money that way. Plus then I can skip the whole salad step, which in my opinion is a perfectly good waste of space that I could be filling up with delicious meat.

 I also did a bit of a survey around my friends and figured that most of them could save almost $400 a month and still eat well and drink mostly to their hearts content.  So lets say we take that $400/month and put it toward say, a yacht.  Now I figure 40 is a sweet age to own a yacht.  So if I invested that $400/month 10% in an index fund and then pull it out when Im 40, I could hop in my money truck, drive down to a dealer and get myself one of these:

 This particular yacht was on sale for $156,000.00….what a steal!  Though you have to find your own women/men to sunbathe on the front.

First of all, what is interest?
Interest is the cost of borrowing money. The person doing the lending gets a fee for allowing the borrower to use their money for a set rate of time. The original amount that is loaned to the borrower is called the principal and the percentage of that original amount which is paid over a period of time is called the “interest rate.” That percentage times the principal is the interest. For example lets take Dave and John.

Dave: John I need to borrow $10 to buy a qdoba burrito. I will pay you back tomorrow…
John: Why would you buy a qdoba burrito?
Dave: It tastes good.
John: Ok, here is $10 but I will charge you 10% interest per day on that.

…..Next Day…..

John: Ok that will be $10 + (10% X $10) so, that will be $11 please.
Dave: whoa $11?
John: Yeah, you should learn what interest means.

So what is compounding interest?
Compounding interest means that whenever interest is calculated, it is based on the original principal AND also any interest that has been earned. So the more often that that the interest is compounded, the faster the total (principal + earnings) grows.

What is this important for me?
Compounding interest is what allows something now to be worth many times the original investment many years from now (say, retirement age). Check out my retirement section for a bunch of examples of that.

How can I calculate compounding interest?
There is a rule called the rule of 72 that makes this fairly easy. It’s not exact, but it gives a pretty good approximation. 72 divided by the interest is equal to the number of periods needed to double the principal. So:

72/i = n

What is a typical example of this?
The stock market. Over the past 75+ years the stock market has averaged a rate of growth of around 11% per year. So if we say 12% just to make dividing 72 easy, thats 72/12 = 6. So at 11% per year it would take just over 6 years to double your money. Thats why people always talk about 6-7 years to double your money investing. It’s based on the average market return.

And I’m not referring to the bonsai.

Or to this. Though if someone finds one of these, please let me know.

Instead a money tree would look a little more like this:

Ok so the graphic isnt very good. But its what it represents that is so mind numbingly awesome that it deserves its own post. Two words: compounding interest. What does this have to do with a money tree? Well think of your initial investment as planting a seed to your money tree. Assuming the market returns at 10% your tree grows another branch with your money on it. Whats better is that every new branch has twice as much money fruit as the branch below it. Then when you are ready, pick away, free money from your very own money tree.