Compound interest is an amazing factor of investing and growing wealth. It is built into almost every financial calculation when looking at retirement, growing investments, and increasing your net worth. Even Warren Buffet said that compound interest played a large part in his accumulation of massive wealth.

Compound interest is what happens when the interest earned on an amount of money becomes part of the principal, and then more interest is then earned on that larger sum. You interest earns you interest. This continues to repeat, and the account is said to compound year after year with new interest being earned because you reinvested the old interest in your account.

Make sense? Here is some math to highlight the effect.

The Math behind Compounding

Compound interest is what happens when interest is added to previous principal and interest. For example, say you have $1,000 in a bank account, earning 10% interest per year. At the end of year 1, you would now have $1,100 in the bank account.

Now, that 10% interest is going to be earned on the new principal balance of $1,100. So, at the end of year 2, you would have $1,210. If you continued this same principle, in year 3 you would have $1,331, year 4 would be $1,464.10, and year 5 would be $1,610.51.

You can do the math yourself here using this formula for any amount of years:

Future Value = Initial Deposit (1 + Interest Rate) ^ Number of Years

Compound Interest vs. Simple Interest

Compound interest is different from simple interest in that in simple interest, the interest is not added to the principal (and as such, there is no compounding). You see simple interest calculated in many financial products, notably car loans. However, in most savings vehicles, compound interest is used. And, different banks can have different periods of compounding. You can open a savings account that offers quarterly, yearly, or even daily compounding of your money. The more it compounds (daily for example) will allow it to grow a little faster than other methods of compound interest.

How To Use The Power of Compounding

Based on the math above, you can clearly see that two factors play a part in the power of compound interest: time and interest rate. So, to make the most of compounding interest, you need to try to maximize each variable.

Time is the easy part. Start saving as much as you can as early as possible. Interest can be the harder part of the equation. You should look for bank accounts and investments that yield the highest interest rates and compound over the quickest period of time possible (daily for example). By doing these, you can maximize and harness the power of compound interest.

How many retirement accounts do you and your spouse have? Do you both have Roth IRAs and 401k retirement plans at work? You may find out after closer inspection that your separate plans do not mesh well with each other. In fact, you may find yourself poorly diversified with a lot of fund overlap if you are not too careful.

You may want to add several checks to your annual investing portfolio rebalancing this year to synchronize your entire family’s retirement plans. Here are some things to consider.

Look At Your Family As A Whole

One of the best ways to synchronize your entire family’s retirement planning is to look at the family as a whole unit instead of multiple accounts owned by two people. Your spouse’s retirement accounts and his or her asset allocations need to dovetail into yours as well. There is a risk of overlapping investments between a husband and wife’s retirement accounts. There are many basic current accounts available that you can chose from in order to help you diversify your investments, savings accounts, and other assets.

For example, many 401k retirement plans promote index funds as their fundamental investment choice. Are you and your spouse investing in the same types of assets without even realizing it? You have the very good potential for both people to be over weighted in an index fund or ETF that invests in a broad market index such as the S&P 500.

Inspect Your Investments And Allocations

There are several ways that you can ensure that your asset allocations as a family provide you with diversification across several asset classes. You can each set up separate asset allocations between, stocks and bonds, as well as both choosing like large and small cap funds,

Are You Capitalizing On Retirement Plans?

A spousal IRA and Roth IRA are another retirement plans that you want to ensure that you are using as much as possible. Even if your spouse does not earn an income, you both can invest in separate Roth IRA accounts assuming that at least one of you has an earned income and meets the contribution limits.

A Roth IRA is such a valuable tool that allows families to reduce the amount of taxes they pay in retirement, and taking advantage of investing $10,000 as a family even if your spouse is not currently working can have a dramatic affect on your retirement nest egg. It can often be worth the effort of one spouse funding both in a family effort to maximize retirement benefits. Families should also strive to ensure that they capture any employer matching 401k contribution if available to one member of the family and not miss out on free money for retirement.

View Your Plans Together

One way to monitor your family’s eclectic collection of retirement funds is view them all in the same place. Services like the ones offered by Mint.com, banks, and other financial websites that allow you to view several accounts from many different sources provide families with a single place to review and focus their attention. It is very easy to see which accounts may be doing well or which ones need more of your family’s focus when they are all displayed on one website. Websites like Mint are great places not only to track your spending habits but to easily see all of your family’s retirement accounts in one place. Mint.com – FREE Money Management Software!

A family should approach retirement thinking like one entity instead of a collection of accounts owned by two separate people. A husband and wife’s retirement accounts can interweave and support each other providing increased diversification when approached as one.

When looking at insurance policies for your home, you have a ton of different options and amendments to choose from. One of the most neglected details but the most important should you ever file a claim is the difference between choosing the actual cash value or full replacement cost.

Should the need arise to file a claim for your home, your insurance company will use one of these two methods to decide how much to pay you. And your choice when it came to checking which box can make a huge difference. Here is what you need to know about each option when insuring your home.

What Is Actual Cash Value

The actual cash value is a method valuing insured property in which depreciation is subtracted from the actual replacement cost. This depreciation is usually calculated by establishing a useful life of an item and determining what percentage of that useful life remains. The useful life of most household items is standardized across the insurance industry.

For example, say you owned a 50” plasma television that you purchased five years ago for $1,000. Let’s say you could buy the same size and quality television today for $750. The standard useful life for televisions is 10 years. So, your Actual Cash Value for the television would be $375 ($750 times 50%).

What Is Full Replacement Cost

On the other hand, you can opt to have the full replacement value when insuring your home. This refers to the amount it would cost to replace an asset at the present time, according to it’s worth. This is different from the actual cash value, which is more like current market value.

With this option, a common stipulation is that the actual asset must be repaired or replaced before the cost can be paid.

Using the above example, the insured would receive the $750, which is the current day value of the same television.

Which Insurance Policy Is Better?

If you’re deciding which is better, it is important to note that insuring for the full replacement cost usually costs more on your annual insurance premium. As such, you should weigh the costs of a higher premium, to possibly paying more if you should need to file a claim. I am a big fan of purchasing insurance that provides full replacement cost for your possessions should you need to file a claim.

What about you? Have you ever been burned by not having full replacement cost on your possessions?

There is a difference between a good company and a company’s stock that makes a good investment. How do you choose and know when a good company may be a poor investment choice? How do you keep from falling in love with a company? These are some of the tricky questions that individual stock investors wrestle with.

Here are a few things to consider when trying to identify when a good company may be a bad investment.

The Right Stock Valuation

Classic finance theory states that the valuation of a stock price over the long-term is based on the current value of its future earnings (cash flows). So, what does that even mean? It means that a company’s individual popularity unfortunately does not always translate into higher share prices. Wildly popular companies can have next to no profits. Just look at the earnings of internet companies like Facebook, Yelp, Groupon, and the like. Far too often, they are more popular than profitable.

The Amount Of Common Stock Float

There is a reason that companies buy back their shares. When a lot of common shares are floating on the open market, each shareholder’s stake is smaller than it would be if fewer shares exist. For example, if there are 100 million shares on the open market available from a company who earned $10 million in profit, each share has claims to $0.10 of that profit (10/100 mil).

If the company reduced the number of shares on the market with buybacks, each shareholder’s slice of the pie would increase. If that same company bought 20 million shares and took them off the market, each shareholder would then have 16 cents worth of the yearly profit for each share owned (10/80). That equates to a 60% increase in each shareholder’s stake in the profits.

What does this have to do with good companies and bad investments? Just take Facebook’s recent IPO as an example. In the last few days leading up to the initial sale of shares, Facebook increased the number of shares that they were issuing to a whopping 410 million from 380 million which diluted each individual shareholder’s future stake in the company by almost 10%. That doesn’t bode well for a stock that was already priced high relative to its earnings.

Stock Structure Can Affect Price

A lot of hoopla has been written about Google issuing a new class of shares of their common stock. The new shares of stock diminish shareholders’ voting rights in favor of the company’s founders. The shares have dramatically less voting rights than original shares owned by the founders which keep over 50% of control of the company solely in their hands. While this is not always a big deal to many small investors, it is something to consider when buying shares of a good company that may make it not so desirable a stock over the long-term.

What Is There Business Model?

At the end of the day, you have to understand how a company earns revenue and makes a profit. A company cannot and should not be valued solely based on how great we think it is. The company has to show tangible results to warrant higher valuations.

There are many reasons why good companies do not have successful stocks with share prices that continue to rise. It is not because they are bad companies or doing things necessarily wrong. Instead there can be a host of reason such as too many common shares on the market, poor share class structure, valuations not based on earnings, fad popularity, unclear business models, and the list just goes on and on.

I have a bad habit of falling in love with companies and brands even though at times they make for horrible stock picks. A classic example is my love for Dr. Pepper Snapple Group despite the possibility of better choices in the beverage market.

What about you? Have you ever fallen in love with a company only to be burned by their stock?

Here are some of my favorite articles this week from some great personal finance writers around the web. Be sure to check them out!

• Why You Shouldn’t Buy Facebook: Part-1 @ Dividend Ninja
• Are You Rationalizing Your Way Into Debt? @ Beating Broke
• Should You Buy Mortgage Protection or Term Life Insurance? @ Good Financial Cents
• First Time Investor Tips for Buying Facebook Stock @ PT Money
• Treating Your Job As An Investment @ Modest Money
• Taking $2,000 Bubble Baths – A Home Maintenance Story @ Financial Samurai
• Build Your Personal Finances through Investment @ Planting Money Seeds
• 101 Ways To Save Money in Everyday Life @ One Cent At A Time

This Week’s Blog Carinvals:

• Totally Money Blog Carnival @ Balance Junkie
• Carnival of Financial Camaraderie @ Young and Thrifty
• Festival of Frugality @ See Debt Run
• Carnival of Financial Planning @ Cult of Money
• Carnival of Retirement @ Simple Finance Blog
• Yakezie Carnival @ One Cent At A Time
• Carnival of MoneyPros @ Financial Success for Young Adults

I bought shares of Facebook yesterday on its opening day on the market after its initial public offering (IPO). Well…it was actually more like one single share of Facebook. I bought it from OneShare.com where I got one single share framed for my wife.

It all started on Thursday when my wife asked me if I was going to purchase any shares of Facebook on Friday when shares began trading on the public market. My wife and I do not really see eye to eye in most cases about finances and investing. She loves the idea of Facebook as a company but does not really care to look at the fundamentals of the company as an investment.

Why Facebook Makes A Poor Investment

While Facebook may be a great company and website that over 900 million users enjoy using, it also may be a poor investment at these price levels. Here are a couple of things to consider when looking at the company’s fundamentals.

• Facebook share price sells for 20 times its projected 2012 revenue. Google trades at about six times its projected revenue for this year.
• Facebook’s $100 billion value is lofty. Apple debuted with a market value of less than $2 billion in 1980. Microsoft had a market value of less than $1 billion after its 1986 IPO, and Google had a market value of nearly $25 billion in 2004 after its IPO.
• Facebook has generated less than $1 billion in net income over the past year. It has a massive user base that still needs to be tapped. They haven’t figured out how to capitalize on so many eyeballs and translate that into profits yet.
• Facebook is struggling to earn advertising revenue from mobile users which have rapidly been increasing over the past couple years.
• Facebook is still locked out of China thanks to the Chinese government’s ban on the website.

Facebook’s IPO almost certainly represents a poor long-term investment at or above the IPO price of $38 per share. That is why I am not buying a large amount of shares for my investment portfolio. But, that has not stopped me from buying a single share for my wife as a gift.

How To Buy One Share Of Facebook As A Gift

OneShare.com provides customized gift stock ownership by making it easy and affordable to buy a framed single share of real stock. The real stock certificate represents true ownership in publicly traded companies. OneShare.com offers single framed shares of stock in America’s favorite companies like Facebook, Disney, Harley Davidson, World Poker Tour, Starbucks, Dreamworks, and tons of other public companies. The owner is entitled to annual reports, declared dividends and any other shareholder perks just as you would if you had bought the shares through a discount broker making this an everlasting gift that is interesting and educational. GiveAshare.com has companies that fit all gift-giving occasions.

10% Off OneShare’s $39.00 Transfer Fee: Use code TENPERCENT.

Did you buy shares of Facebook on Friday? Are you going to buy shares next week?

What is one of the first things that you think about when you get pulled over by the police for speeding or some other traffic violation? I know that one of my first thoughts goes to my car insurance and how much my car insurance premium may go up if I get a ticket. We all understand that tickets affect insurance rates, but many of us do not know how do speeding tickets affect insurance rates and how other violations play into our rates. Now, Insurance.com has done the leg work for you with a new study that they have just published dissecting how much auto insurance rates increase for common driving violations.

Insurance.com analyzed over than 490,000 car insurance quotes from 14 different car insurance companies over a two year span. They looked at drivers who had 14 of the most common driving infractions and compared them with drivers who had clean driving records. Their study estimated the annualized premium increase that drivers could expect for certain combinations of driving infractions, and the study also takes into account and controls for personal attributes such as their state, time with insurer, marital status, age, and other factors to comprise your car insurance premium.

Based on Insurance.com’s study and analysis, here is how much common tickets can impact your car insurance rates on average:

1. Reckless driving: 22% increase
2. DUI first offense: 19%
3. Driving without a license or permit: 18%
4. Careless driving: 16%
5. Speeding 30 mph over the limit: 15%
6. Failure to stop: 15%
7. Improper turn: 14%
8. Improper passing: 14%
9. Following too close/tailgating: 13%
10. Speeding 15 to 29 mph over limit: 12%
11. Speeding 1 to 14 mph over limit: 11%
12. Failure to yield: 9%
13. No car insurance: 6%
14. Seat belt infractions: 3%

While this ranking is not all inclusive of the many possible driving violations that you can be flagged for, it does paint a very interesting picture of what you can expect from your car insurance company if you receive a ticket. One thing that jumps out at me is that not wearing your seat belt only typically gets you a 3% increase in your car insurance premiums. While things like improper turning and passing can earn you a severe penalty. I would bet that your life insurance company would love to have that seat belt information so they can increase your rates for that policy instead.

Also, keep in mind that many car insurance companies do not always penalize drivers for their first infraction. You may receive a pass for your first ticket in a several year span, but you can believe that you will be hit with higher premiums sooner rather than later if your poor driving continues.

What about you? Do you think that these car insurance rate increases are accurate? Have you been hit with higher premium increases because of a ticket? Is it just me, or is it crazy that a seat belt violation only nets you a 3% increase on average? I’d love to hear your thoughts in the comment section.

Recently my wife and I bought a new car. I hate buying a new car because I always feel like the deck is stacked against me. As much as I try to be prepared, I feel like the car salesman has more information than I do and subsequently the better hand in negotiation. But, there were a few things that I had going for me this time. Here is how a little preparation and one simple question he me save money buying a new car.

A Little Preparation Goes A Long Way

Besides doing your homework and trying to figure out exactly what the dealership purchase the vehicle for at wholesale, there are a few things that you can do in order to save you money on buying a new car. One of the biggest ways to get the most bang for your buck is to sell your car yourself. Don’t trade it in to the car dealership. This is almost a guaranteed way that you will not get the most money that you possibly can for your trade in.

Another thing you need to do before you step foot on the car lot is to secure your financing from your own bank. Apply for a loan from your bank and know how much you have been approved for and at what rate. That gives you great bargaining power and a number on the wall that the dealership has to beat. You will save time and money by already having a check or authorization from your bank before you head to the dealership. The car dealer I bought my new car from tried to wear us down by keeping us waiting for hours. In the end, they hoped that we would just settle for their financing offer to get out of there quickly. They even told me, “If you have to call your bank to try and beat our rate, it will be at least another hour unless you have a preapproved purchase authorization.” The smug look on his face dropped when I held up my preapproved loan paperwork with a killer interest rate.

A Simple Question Saved Hundreds

The dealership quickly matched the interest rate of my bank’s car loan thanks to my wife and my excellent credit score. But, simply matching it is not good enough. They were flabbergasted when I told them no and that I would use my bank. They had researched my credit report and saw that I have never financed a car through my bank because the dealership typically handily beats their quote. They asked me why I would use them this time for the first time. I love my bank, but I also love saving money. I simply asked the car dealership to do better. I asked them to beat my bank’s rate. After a few minutes in the back room pretending to sweat about it, they readily agree and beat my bank’s rate by almost half a point. You may be wondering why I didn’t call my bank to try and get them to beat the new car dealership rate. That’s a great idea, and I tried that last time. But, alas, my bank has a policy not to get in a rate war. Their one rate they offer based on credit score, loan amount, and other factors is all they will do.

While I often feel like I get beat up on the final sticker price and how much money the dealership actually paid the manufacturer, I know that I did everything I possibly could to win the battle for a good trade in price and low car loan rate.

What about you? Are you like me and always feel taken advantage of when buying a new car?

Here are some of my favorite and great money articles this week from some great personal finance writers around the web. Be sure to check them out!

• Working From Home and Business Insurance @ Beating Broke
• 4 Simple Steps for Managing Finances After College @ Good Financial Cents
• 10 Things to Do Before You Make an Offer on a House @ PT Money
• Career Lessons From My Mom @ Modest Money
• How To Outperform The Stock Markets And Make Ladies Love You @ Financial Samurai
• 6 Ways College Grads Can Save On Their First Apartment @ Planting Money Seeds
• How Can I Refinance My Mortgage With Negative Equity? @ Life And My Finances
• How Smart Phones Can Help Manage Finances @ One Cent At A Time

This Week’s Blog Carinvals:

• Totally Money Blog Carnival @ Balance Junkie
• Carnival of Financial Camaraderie @ Young and Thrifty
• Festival of Frugality @ See Debt Run
• Carnival of Financial Planning @ Cult of Money
• Carnival of Retirement @ Simple Finance Blog
• Yakezie Carnival @ One Cent At A Time
• Carnival of MoneyPros @ Financial Success for Young Adults

If you are a homeowner, you know that it is expensive to maintain. I never realized how many things you are nickeled and dimed for until buying my first house. Not only do you have your mortgage, insurance, taxes, utilities, and possibly even association dues, but you’ve also got the little things you don’t dream of like home maintenance now falls on your shoulders. The yard or fence needs to be refurbished. These were not issues when you were a renter. With all of these bills adding up, you may be wondering if you could skip out on something as minor as home maintenance or maybe cut a few corners here and there? Here are some reasons why home maintenance is so important and can affect your homeowner’s insurance.

Pay a Little Now, Or Pay More Later

Home maintenance can be expensive no matter what the project is. Maybe you are replacing a broken sprinkler or repairing some broken boards on your deck? No matter what the project happens to be, it takes time, effort, and money. Some projects are bigger than others, but every project requires all three.

However, with almost every home maintenance project, the longer you put it off, the more expensive it will be in the future. As such, you are probably better off paying for it now and taking the time to complete it now instead of waiting for the problem to get worse.

For example, you may not worry too much about that broken sprinkler head today because it is just one day. Then, one day becomes, three, and then it is the following weekend. Now, in that week you took to address the issue, you wasted a lot of water. And when your water bill comes, you could get a rude awakening with a huge bill. This is just one simple example, but it applies to most other home maintenance issues as well.

Not Tackling Home Safety Can Hinder Insurance Claims

A lot of home maintenance items revolve around safety. These could include repairing decks, checking the heater, cleaning equipment, or more. You really cannot compromise the safety of you and your family, so you shouldn’t delay or skip out on maintenance of these items.

If, heaven forbid, anyone were to get hurt because you failed to maintain your home, not only would you feel incredibly guilty, you could be liable for damages (for example, a deck breaks at a party and people get hurt). You don’t want that to happen, so take the time and maintain your home properly to being with.

Neglecting Home Safety Can Negate Insurance

If you have been neglecting to get a leaky roof fixed and now how a large mold problem, you can find your homeowner’s insurance policy actually being denied because of your neglect in repairing a known issue you had with a leak. While skipping home maintenance and some repairs may seem minor enough that you may be able to push them off to another day, you could find yourself in deep water with your your homeowner’s insurance company if you are not careful.

What home maintenance do you continue to put off day after day? I’d love to hear your thoughts in the comment section.