1. Get good grades in school
2. Get a good paying job
3. SAVE
Now this may sound a bit like Rich Dad Poor Dad, but this is also the way it is here. Is there something wrong with that? No. What is wrong is that we are not taught HOW to, and of particular note is Lesson Number 3.
How must we save then?
Saving becomes logical when we learn to attach a goal to it. Are we saving up for a down payment for a house, a car? Saving for a trip abroad? Afterwards, we put a time frame to the goal. When do you project you would need the house? The car? Can you postpone the trip abroad in favor of something you really need?
When you have answered all of the questions above, then that's the time you should start considering where to put your money. Our common investment vehicle are savings deposits, and time deposits. I am sure you are aware of the interest you earn from these placements (which are 1% and 5%, gross, respectively).
They are below inflation. This is probably the reason most Pinoys aren't rich! We saved, but we placed our monies in the wrong instrument. Imagine if you placed your money in these instruments the past 5 years. The inflation rate on average was about 6.5%! What can your money buy now?
I attended a seminar by Bo Sanchez last night. It was sponsored by an online brokerage firm. (Just send me a message and I'll inform you who they are). One of his most important messages is the power of compounding.
Compounding is considered the 8th Wonder of the World by no less than Albert Einstein.
He may be famous for this, but let's credit him with the idea of compounding.
Compounding is a key concept in investment. It is the basic and most important tenet of investment. To compute how much your money will be X years from now, we use the formula of Future Value-
Future Value = Principal Amount Now x ( 1 + Interest Rate Per Year) ^ # of years to be held
For example. You are aged 30 now. If you invested Php 12,000 this year in a mutual fund that nets you 10% p.a., and you envision yourself pulling that investment out after 10 years, the value will be:
FV = 12,000 x (1.10 ^ 10)
You'll have Php 31,124.91 by the time you're 40! Assuming an inflation rate of about 6.5%, the Php 12,000 today would have been worth Php 22,525.65 by that time. By investing something higher than the inflation rate, you actually have an excess of Php 8,599.25!
If you want to save 12,000 per year for the next 10 years and invested in that same mutual fund netting you 10% p.a., there will be a different computation.
For now, the key concepts here are these: time and value invested. However, the more important between the two is time. If you invested that Php 12,000 way back when you were 24, from that first job, by age 40, you would have Php 55,139.68!!
On your free time, read this. I love Investopedia. They may have a lot of ads, but their topics are not hard sell. If you want a good online resource, go to Investopedia.
We'll discuss more about compounding in my next entry.
5 comments:
ahhh yes. the magic of compounding. Buffetology - a book about Warren Buffet's investing methods, also states that Buffet uses lots of mathematical equation to compute for his annual compounding rate.
true enough, teaching the people the do's and don'ts of investing and not just settle merely on getting good grades, get a job and save mentality, I believe we will be able to help a lot of Filipino people to attain financial freedom in the future.
Hi to barry and ofw_cebu.
Thank you for dropping by :)
I strongly believe that in 5 years' time, we'll have widespread knowledge of investing.
As long as we save, AND, know where and how to save, we'll be looking at a new generation of millionaires in 10 year's time. :)
I must say that's a nice goal.
I do hope that there are more seminars that teach investing. I don't have anything against trading, but let's face it, there are a lot of trading seminars out there than investing seminars. I believe that knowledge of the two can help not only in the individuals, but in the economy as well.
hi to all,
on the term compounding, in the real world, what particular/specific investment gives compounding interest? isn't mutual fund yields compounding interest?
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