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Have you
ever wondered what’s the eighth wonder of the world?
Let’s
start first with a story. Long time ago in China, a
story was told about a man named Wong Li. He was a smart
man and had helped the emperor of China many times in
solving the country’s problem.
The
emperor, wanting to show his gratitude, insisted that
Wong name his reward.
“Great
emperor, I have only a very simple wish. I would like to
ask for a grain of rice today to be placed in a
stockroom. Every day for two months, whatever rice
remains in the stockroom must be matched by an equal
number of grains. If I leave my single grain of rice
tonight, one will be added to it. If I leave those two
again, then there will be two more grains added on the
next day. If you could grant me this wish I would be the
happiest man alive in China.”
The
emperor thought he was getting a good bargain, so he
agreed. By the 12th day the emperor would only need to
give 2,048 grains of rice. But after a month, the
emperor realized the price of his agreement and called
Wong into his castle to be put to death. Why? The total
grains of rice the emperor had to pay after the end of
the second month, assuming a 62-day period was
4,611,686,018,427,390,000 grains of rice or 4.6
quintillion grains. That is more than all the rice in
China combined.
You
might have guessed right. The eighth wonder of the world
is called compounding.
The
above story took it to the extreme and used what
mathematicians called a geometric progression. What do
you think would have happened if Wong Li had always
taken one to eat and leave only one every night? The
answer is, at the end of the 62-day period he would have
exactly 62 grains of rice.
What if
he took all of the additional grains every day and left
only one grain every time? Well, he would have ended up
worse than the previous scenario. He’ll end up with the
same one grain of rice at the end of the 62-day period.
Knowing
this basic principle and applying it could go a long way
in making your strategic investment decisions. It’s not
what how much you earn that counts. It’s how much you
get to keep and reinvest.
If
you’re having trouble coming up with surplus cash for
saving and investing, consider the following guidelines:
Remember to pay yourself first. This is a good rule to
follow, especially for those needing more discipline. It
simply means setting aside some money for investment
first before paying off regular expenses.
Second,
live within your means. Every time an urge to go on a
shopping spree arises, ask yourself these four
questions. One, do I need it? Differentiate between a
need and a want. Two, what is the before tax of doing
it? Remember that the money you’re about to spend is
after tax.
Three,
what is the impact of this on my ability to meet my
financial objectives? Think long term. Fourth, is there
a less expensive alternative? Less expensive substitutes
and alternatives abound. Make use of the benefits of the
free enterprise.
After
being introduced to compounding, let’s get to know its
sidekick. But first, try answering this.
“John
and Jeremy are two close friends who happen to have the
same birth dates. John, upon getting his first job at 22
years old, invested P5,000 every year for the next eight
years at 10 percent.
But he
eventually stopped investing after getting married at
age 30. But he did not withdraw any money. He just left
it to be reinvested at 10 percent per year. He
anticipates using it for his retirement.
Jeremy,
on the other hand, started investing after being married
at age 30. He invested P5,000 every year for the next 25
years at 10-percent per annum. At 55 years of age, they
both decided to retire. Who do you think has more money
for retirement? Pause for a while before reading the
answer below.”
The
answer might surprise you. John would have accumulated
P681,474.67, while Jeremy will only have P540,908.83.
John had more despite the fact that he contributed a
total of only P40,000 while Jeremy contributed a total
of P125,000. We’ve just proved the Filipino saying: “The
early riser beats the hard worker.”
There
you have it. You’ve just learned two important basic
financial concepts you can use in planning your
financial future. By using the power of time and the
power of compounding to your advantage you will reach
your financial goals easier and faster. So, what are you
waiting for? Start now!
Josefino R. Gomez, RFP is a registered financial planner
member of RFPI USA. He is also a certified public
accountant, a certified real estate broker and a
certified treasury professional. He is the founder of
www.wealthbulb.com, a web site dedicated to educating,
empowering and improving the wealth and financial
well-being of people around the world. Questions about
the article and other queries may be e-mailed to
queries@wealthbulb.com or josefinogomez@yahoo.com.
Join the Seventh RFP Program (July 7-August 25, 2007).
Visit www.rfp-philippines.com or inquire at info@rfp-philippines.com/Tel.
No. 6342204. |
