Successful? Why, yes I am.

Wednesday, October 11, 2006

Success = Compound Returns!!

Financial success that is....

Majority of people know what compound interest is and how it works etc. We all did it in maths class back in high school racking our brains trying to calculate how long much interest we'd earn if we put in X amount of principle, with Y% p.a. interest, at T time frame...yada yada...

Dont worry about the mathematics of the thing, I'm not here to share boring stuff. Instead I want to share something I recently came across in another blog a few weeks back and I can't help think, "damn, why didnt I start sooner!"

okay have a quick look at this.... Power Of Compounding - flash animation

The beaty of this animation is that it shows the difference in time frames. It puts into context the saying, 'the earlier you start saving for the future, the better.'

Alright, so lets take a look at some graphical pictures to see what would happen to my savings. Now to remind you I'm putting away $1000/month into a managed fund (my initial deposit was $2500), and I only started this last year in October.

Okay take figure below. If I only did this for 5 years I would end up with $77201.47

Alright so Ive decided to stop putting this money away and now im just "sitting on it" so to speak, so by the time I turn 55, I'll have approximately $566000. (assuming average rate of return is 8% p.a)

Another comparison. If I didnt stop at year 5 but kept going, by the time I turn 55 I'll have close to a whopping $1.5million. Again rate of return is same at 8%.

Lets see some figures with different return averages

Below if we left the $77201 after year 5 but got 10% returns, Id end up with $933219 when I turn 55.

If return on investment was 12% p.a, Id be sitting on $1.5 million.

What if I managed to get 23% average returns p.a. like Mr W. Buffet has. Id be sitting on $23million !!!

Now although at present Im a passive investor, I do plan on becoming an enterprising investor. For more on this topic I hope to do a book review on "The Intelligent Investor" - by Benjamin Graham. Im currently 1/3 of the way through and so far its compelling reading.

An interesting thing to note. Rule of 72. Heard of it??
Basically its a quick approximate calculation that allows you to determine how long it will take you to double your money depening on the annual rate of return. For example, if rate of return is 5%. Take 72, divide by 5 = 14.4 This will give you approximate number of years to double your money. Another example, If annual rate of return is 10%, 72 divided by 10 gives 7.2 years. Pretty nifty eh!

So in conclusion, if you can, start to put your money away early. Speak to financial advisors and get knowledgable on the concept of investing long-term. Majority of us will not be millionaires in our 20's and 30's, very few of us even come into decent inheritance money. By the way if you do get some inheritance money, INVEST IT! Or if you win lotto (fat chance) invest that too!! In my opinion if you want to be successful when it comes to wealth. Think long-term and start saving and watch compound returns do its thing.

The above pictures are screen shots taken from a savings calculator, found at


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