How Money Makes Money

Saving for retirement can be difficult; however, you have do it, and the earlier, the better.  This is because time is money.  People generally do not realize this early on when their savings balances are low.  But, early years of saving begin to multiply in a multitude of ways later on.  Below are five ways your retirement money makes money:

1. Interest Earned.  Money set aside in a savings account, CD, money market or a bond fund is going to earn interest payments.  A savings account or CD are lower risk, whereas a money market may have some added risk. 
2. Dividend Payments.  Higher up the risk scale is owning dividend-paying stocks.  If you buy a broad index fund of the stock market you are likely to earn dividend payments commensurate with inflation, more or less. 
3. Tax Deferral.  Whenever you can defer taxes your money grows faster. 
4. Rebalancing.  By setting as specific weight of stocks to bonds, for example, you can reset your portfolio periodically to regain the right mix as a percentage.  This way, you automatically sell gainers and use the proceeds to buy the relative “losers” in your portfolio.
5. Compounding. This takes small dollars and makes them larger with time.  A market rate of return is likely to double your money in ten years or less as dividend and interest payments are reinvested, and there is price appreciation as well. 

See Mitch Tuchman, Retirement: 5 Ways Money Makes Money, Forbes, Dec. 22, 2014.