HAMBURG, GERMANY - DECEMBER 09: A woman checks out the offerings of a jeweler on December 9, 2013 in Hamburg, Germany. According to a recent study people in Germany will spend over EUR 70 billion this Christmas season on gifts, food, travel and decorations, of which they will spend EUR 10 billion online. (Photo by Philipp Guelland/Getty Images)

I was a very poor money manager for most of my life. I always ended up with more month than money. But as I got older I realized that money is a tool, not just something to be used to acquire things.

Money can produce more money without you doing anything. It’s really an amazing thing.

If you spend money it’s gone forever. Why not invest some of it rather than spending all of it?

Pick A Lifestyle

Here are two scenarios. You pick the one that sounds best.

  • A Doctor making $300,000 a year in private practice.
  • A business owner making $150,000 from the business and another $150,000 from rental property.

They both make the same amount of income but which one sounds better? If something should happen to the doctor where he or she can’t work, what happens to that $300,000 yearly income? It stops.

What happens if the business owner goes out of business? He or she still has $150,000 in income from an alternative source. Total dependence on one income stream can be a very shortsighted way to manage your money and your life.

It’s Called Compound Interest.

Warren Buffet, the “Oracle of Omaha” as he is commonly called, is a very shrewd investor. He has a very simple formula. He invests in well run companies with future growth potential that pay dividends. In other words he makes more money using money he already has.

Money that’s invested should double about every 7 years. The more you can invest the more interest you will make.

Consider this. If you invested $5,000 in a Roth IRA for your child at age 18, and realized a modest 9% return, and never added another dime, at age 65 that child would have over half a million dollars.

That’s the power of compound interest.

Now imagine where your child would be if he or she made regular contributions to that account over the years. You could be talking several million dollars.

And best of all, when the time comes to take the money out of the Roth IRA, it’s all tax-free. No tax on any of it.

Some Final Thoughts

I try to think of money as an employee. I would not hire someone if I thought that action would reduce my income. But, as we all know, dollars don’t buy as much as they used to.

The obvious answer to that dilemma is to make each dollar worth more. Investing it wisely does that. Each dollar you put away today could double in value in as little as seven years.

Is your money working for you?