Sunday, April 4, 2010

Can you improve your situation?

Is there things which you are doing (or fail to do) that you could change today in order to brighten your future? The answer is “compounding” and it does not matter if you are still working or retired.

Time is Money

A simple equation behind average people becoming millionaires is saving a little bit over a long time.

Compounding is a very powerful tool that you should capitalize on it right away. Time is essence. The longer you have, the better. Compounding makes millionaires of average people who save a little bit over a long time.

Given a choice, would you choose to have a $0.01 that doubles daily for thirty days or $1 million? You might be surprise that the better choice will be taking the $0.01 which double daily as it would grow to $10.7 million within thirty days with 100% daily interest. Of course you will never see a 100% daily return in real like but this is to bring the idea across that compounding is such a powerful tool that you should capitalize on it right away.

Albert Einstein considers compound interest not only to be man’s greatest invention, but it is also the most powerful force on earth. Baron Rothschild called compound interest the “eighth wonder of the world.”

You are never too young or too old to start

For a 30-year-old who can achieve a growth rate of 8% over a long time with a diversified portfolio, using $100 per month ($42,000 over 35 years) will be worth more than $200,000 by age of 65.

However, if you are looking at the big picture, as shown in the table below, original investment of $100 per month will be worth about $500,000 at age of 75 and almost $1 million at age 85.

You might be wondering which 30 year old is willing to wait till age 85 for the big payout. But that is just a target, as you are planning for the long term by setting milestones by investing a portion of your savings to mature during different age (e.g. 65, 75, 85)

Some of you might be thinking it will not be possible to achieve 8% lifetime return. Nobody in the world will know what the future will hold. But historical record has provided that past markets delivered 8% or higher return for patient investors who invest month after month consistently, regardless which direction the market is moving towards. From 1926 all the way to 2008, strategy of investing monthly in a diversified portfolio has averaged 9 to 14% per year over time for every 35 year period.

Thus even a small investment can reap great rewards provided it is being given time to do so. You don’t have to be 30 years old to take advantage of compounding. A 50 year old can also take advantage of it as there is no reason why he cannot carve out a portion of his savings to maximizing compounding effect.

A 50 year old can also turn that same $42,000 investment into almost $180,000 (8% return) at the age of 75 by putting aside $233.33 per month for 15 years till age 65)

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