The Power of Compounding

One of the things you need to know about building wealth is the power of making regular periodic investments and reinvesting rather than spending the profits.
The results you will with this discipline are surprising. Let’s say you start with nothing, and decide putting PhP 5000 of your income into an investment account every month, and you commit not to touch your money in investment. That means you can’t take withdraw any funds until you’ve reached your long-term goal.
The overall market, at least as measured by the S&P 500 index, returned 11.8%, on average, annually over the past 10 years. If you achieve that same return, you’d have PhP 1,140,000 after 10 years. But it gets better. You’ll have PhP 4,860,000 if you stick with the plan for 20 years and a cool PhP 17 million in 30 years.
The process described here is a combination of two powerful investing strategies:

Compounding and peso-cost averaging.

Compounding is simply reinvesting rather than spending your profits. By doing that; you capture the future returns on your reinvested profits as well as on your original investments.

Peso-cost averaging means that your fixed monthly investment buys more shares of a mutual fund or stock when prices are low, and fewer shares when prices are high. For instance, if you were investing PhP 5000, you’d get 500 shares if a stock were trading at PhP 10, but roughly 555 shares if it dropped to PhP 9.

Discipline Required. The hardest part of implementing these strategies is making the regular monthly investments. It’s easy to procrastinate adding to your account if the market is down or if you could use the cash for something else.
The best way to make sure that the regular investments happen is to automatically deduct a fixed amount from your monthly salary and directly invest it in a mutual fund account every month.



The Rule of 72

Do you want to know how long it takes for your money to double if you know the interest? All you need to do is apply the Rule of 72. Divide 72 by the given interest rate.
Example: Someone asks you to invest your hard-earned money at 8% interest per annum.

You can easily compute in your mind, 72 divided by 8 is 9. It will take 9 years before your money doubles. Then decide if this is in accordance to your personal financial objectives or not.

Do you want to know at what interest would your money double if you know the length of time your money will be invested? All you need to do is apply the Rule of 72. Divide 72 by the period.

Example: Someone asks you to invest your hard-earned money for 10 years.
Divide 72 by 10 and the results would give you 7.2. The investment should yield 7.2% per annum for your money to double in 10 years.


Links:
www.business.inquirer.net/money/personalfinance

www.pinoysmartsaver.com
www.colaycofoundation.com
http://www.apersonalfinanceguide.com/