One of my interest I’ll be exploring with this blog is wealth generation. I’m sure you’ve heard the story of how the Indians who owned the land we now know today as Manhattan island could have had a veritable fortune had they known about compound interest (and a bank would have given them a nice 8% rate). Long story short, the Indians got about $16 worth of beads and feathers. Some argue it was roughly $24 but it makes little difference to the moral even if the numbers are different. Basically, had they cashed in those beads, got a nice 8% rate compounded over the around 300 years they would have had enough to buy Manhattan and have a few hundred millions left over. Bearing in mind that Manhattan is the most expensive property in the world and is estimated at a value of $7 trillion, it shows compound interest is immensely powerful.
Right now, you like myself are thinking: “I don’t have 300+ years to make trillions”. This fact is relatively obvious, what you need to do is lower your expectations somewhat. Firstly, you can become a millionaire through saving. The second issue to remember is that this will take time. If you’re willing to wait and are averse to risk, this is a great method to get rich slowly.
Since I love doing mathematical calculations, lets look at a few small calculations. (Since I’m lazy I found this information here)
The current rate I get on my money market account is just under 10%. Due to the fact that I have no debt, the interest rates going up constantly is a good thing for me. Lets assume that I put R1000 away every month and a nine percent interest rate. Lets also assume I am starting on absolutely nothing (this is incorrect as a money market account requires a minimum amount but other accounts will require less). What this means is that it will take me just under 24 years to save up to a million.
If you feel that this is to much money, lets use a monthly payment of R500 with all the other variables being the same. To get to a million rand with take you 27 years. Now if you adjust the monthly payments for inflation rates you should logically have the amount that a million rand is worth today. Using that R500 calculation the total amount we spent to make that million was a meager R162000. By my logic you’re almost multiplying your initial investment by 8.
Now again you’re still thinking, who the hell has the patience to wait about 25 years to make a million? Put it into this perspective, if you put away R500 a month when your first child is born you will have a million rand to invest in them by the time they are 27. When I say invest you could help them start a business, buy a house or what ever they need.
The moral is the story: Save some money, it makes a lot of sense.
Go to this website, do the maths and consider next time when you spend R500 a month on something superfluous.
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Hi there! Found your blog on yahoo – thanks for the article but i still don’t get it.