A simple math and beyond - Does it really work? June 17, 2007
Posted by nbeyond in : investment , trackbackBecause of my job, math is not something really far away from me. Recently, I felt like trying some calculation out using spreadsheet for the first time in my life to see the power of interests by numbers. Yeah, I am more about the number believer but mostly not in a money way. Before calculating, surely I needed some assumptions that necessitate my calculation. So I set those up like…
- Annual saving - 10,000 euros.
- 10 % averaged earning rate out of the investment by whatever means….
- Time of investment 30 years.
- No inflation effect considered.
- No effect caused by fluctuation of the earning rate (deviation).
- No tax applied on your capital gains.
If you are familiar with making these assumptions first and developing from them, you can already notice this article is only for those who can at least save some money meaning mostly those who have jobs. To those who have a debt, just clear your debt ASAP. This article is not for you. I have thought about the debt some times. I have reached to the conclusion that there is no good or bad debt. Some define the debt that is tax-deductible to be good and the debt that is non-tax-deductible to be bad. Unless the debt is given to you for example from your parent at a truly zero interest rate, every debt is bad. A legitimate way to constrain your life bit by bit. Sounds so much capitalism. But I think that’s right.
Living under capitalism, it would be much better using capitalism than just complaining about capitalism. It does not matter if you are rich or poor. To my understanding, it only matter if you invest to make a use of the power of interests or to be driven by it. This makes a clear difference between masters and slaves. I have to confess I am so much extreme on this. More or less, I think that this is true.
Back to the simple math with assumptions that you save 10k every year, invest all your extra money into stocks or funds or real estates, and earn 10 decent percents of your investment, the total of your money with no inflation considered will become 185K euros in 10 years, 640K euros in 20 years, and 1.8 million euros in 30 years.
Considering life span easily expended thanks to the medical technology, those who are at least under 50 will work until 67 with no problem. In fact, this is the retirement age that German government will establish sooner or later. For your info I will put the result of this simple math taken from the spreadsheet. To visualize the power of your investment, I made a simple figure.
The curve clearly shows that your money increases higher rate near the end of your investment period.
Things that may shake this scenario up not to work….
- You should find out a very decent way to earn 10 % annually. This 10 % averaged earning rate does not seem easy although John Chow sees it differently. This is the trickiest part I believe.
What we learned from this simple math….
- Clear your debt ASAP. Then, join the wagan that makes a USE of the POWER.
- What about my own castle (My own HOUSE)? - I have to think about it. I’m more cling to putting an effort to make more investment because in this way future is more under my decision makings than the bank or the big guy’s decision on your mortgage rate. Still, owning your own castle is hard to just get it off.
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