Archive for July, 2009

I call it the 8th wonder of the world. Certainly in terms of finance, to understand the principle of compounding interest and apply it, is one of the most powerful tools any person can have in order to create true wealth.

Let us look at the word compound. What do you understand is the meaning of that word ? Some people might answer something like ” well compound means to grow on it self to keep multiplying”. That answer is correct.

I would add to that by saying to me Compound means Secure. Think of a Prison Compound. The idea is to keep prisoners in. Safe and Secure.

So let us add both these ideas together. Safe and Secure something that grows and continues to multiply.

And before you say well we have that in a bank account in a vault in a big building , ask yourself has it ever multiplied ….it wont at 3.5 % interest per annum less bank fees, tax etc.

The secret to compounding interest is to Invest Young ( very Young ) and do not rob that investment under any circumstances. I had hoped to scan a table showing what I mean but instead I will simply explain it.

Investor A  chooses at age 26 to put $2,000 a year every year faithfully into his bank account until  he retires 40 years later at 65. He does not touch the money and it grows at 6.5% average per annum.

At the age of retirement he has invested $80,000 the money has reached $893,704 a 11 fold increase.

Most of you would say thats not bad which it is not, but let us look at Investor B.

Investor B chooses to start 8 years earlier at age 18  putting the same amount of money as Investor A but rather that carrying on putting $2,000 a year until retirement stops at age 25.

His total Investment is only $14,000 , but the amazing thing is that at age 65  he has more money ($930,641) but an amazing 66 fold increase!!! Same interest Rate. Same bank.

All from $14,000.

You see the earlier you start to save the better. Investor B had $20,872   in his account at the same time ( at age 26) that Investor A began his savings.

Banks love to give ( in the old days) little money boxes  for very young children to start saving. Nothing wong with that.

But like the big bad wolf they introduced  (when the children were leaving school) the banks introduced things like EFTPOS cards, Debit Cards, Credit Cards, Over Draft Facilities, High Ratio Long Term Mortgages …all designed to keep people in debt long term.

Make no mistake Banks are product driven ….to sell things. Service and service alone went out in the 1960′s

Take ownership of your Investments. Don”t listen to fools and even if you are older than 18 , start saving now,

And if you have children , relatives or young friends try the example I have just explained…you will be amazed!!!

I will write again Soon

Lindsay Walker

29th July 2009.