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Friday, November 2, 2007

A Crystal Ball That Predicts Your First Million

So you like magic and mysteries, fantasies and fairy tales, eh? Sorry, but this blog is nothing about the sort. But when it comes to talking about having one million, it never fails to bring anybody to enter into some dreamy state. Imagining the places you can go to, stuff you can buy and whatever else you can do with it, who wouldn’t want one million? A short while later, you snap back to reality and get back to your job. The scene is just too familiar.
Nothing wrong, of course, with this habit of daydreaming. After all it’s a nice way to motivate yourself to keep on doing, or being better at, what you do. But one practice that’s probably being overlooked along with this habit is asking yourself one important question… “How do I get my first million?” (Is that a blank face?)
There are lots of answers out there, but what I’m going to explain here is probably the most simple, yet most powerful tool you’ll ever come across. It’s called compounding. (Rich folks are laughing at us, 'cause this concept is like the alphabet to them.)
This is how Webster defines it:
to pay (interest) on both the accrued interest and the principal


Don't be too scared, it’s less complicated with an example. Say you have 100 and deposit it in a savings account that earns 10% per year. For three years, this is what you get:
100 x 1.10% = 110 (first year)
100 x 1.10% = 110 (second year)
100 x 1.10% = 110 (third year)
Total interest: 30
With compounding, you put back your interest or profits so that it helps increase your deposit amount. Here’s what it looks like with compounding:
100 x 1.10% = 110 (first year)
110 x 1.10% = 121 (second year)
121 x 1.10% = 133.1 (third year)
Total interest: 33.1
Can you see that difference?! With the same 100, compounding generates far better profits than you could ever imagine. Unbelievable!
OK, that really shouldn’t convince you just yet. To demonstrate how powerful compounding really is, I made an Excel sheet where you can put in your current age, how much you can save monthly, how many years you want to save and how much annual interest you can get.
In the example below, a 25-year old who commits to saving 2,000 monthly for five years at an annual interest of 10% can reach his million by age 50 (without compounding, at age 67). With just a measly 2,000 with consistent effort for just five years, it's written in the stars that you're going to be a millionaire by age 50!
And if you came late in the game, say at age 35, all you need to do is double your monthly savings and you’d be a millionaire too at about the same age.
This is so simple, why hadn't I known this before?!
So if that got you curious as to when you’ll get your very own million, feel free to download this crystal ball compounding calculator (virus free, but scan it nonetheless). Play with it and see what age should you start, how much should you save monthly and for how many years for you to reach that goal.
For those who are familiar with pension plans and other insurance products, this is the same concept why you get a significant amount of money at the end with the little contribution that you make.
There’s really no magic, just math folks doing a trick with numbers.
When you’ve downloaded the calculator, try this one: monthly savings = 0, annual interest = 50%. You get very neat results.
So start saving, investing and compounding now! If I had embraced this concept ten years ago, imagine what difference that would’ve made. Well, daydreaming is over… Plan your future accordingly!

Please check these other articles about compounding:
For where you can get high interest rates, there are available bank deposits and mutual funds around where you can invest in. Check these PinoyMoneyTalk threads for some info:

6 comments:

Anonymous said...

Good job on your excel application! For something similar online, please take a look at Millionaire Calculator. Thanks!

Rael said...

Thanks! I already saw your Calculator via your signature at PMT. Nice!

Here's hoping these little tools of ours inspire others to consistently save and invest. It's not too hard after all! ;)

Moneyceo said...

10% per annum is a very low return for those who have dream to be a millionaire. Why dont you take a look a a very a good opportunity in Trading, Investing in something with higher return ( 60% per annum should be good) You can always browse my blog to learn how to have the right mind setting to reach your goals.

Rael said...

Hi moneyceo, 10% p.a. is low indeed! The article however only aims to educate folks who don't know how powerful compounding can be. And with that, hopefully they start saving and investing.

I'm actually doing stock trading and just beginning to get my feet wet in forex. You got a nice site there.

Good luck to us!

Anonymous said...

You know, I am a saver and every payday I really put some of my salary to my savings. The problem now is where could I find that investment that offers 10% per annum? Please don't mention the rural banks as it already had gone kaput. Some maybe are still existing but the initial deposit is too high for an ordinary employee like me. Would you know other investment vehicles that could give that interest with a low capital?

Rael said...

In a bull market, 10% is easy. You can also try lending, or a business. Whatever you can find that matches your risk/reward personality.

If you can't find a 10% pa investment, adjust how you save... at starting age: 25, monthly savings: 4000, years to save: 10, annual interest: 5%, you'd be a millionaire by age 45.