The Awesome Power of Compounding Interest

Imagine if you were to earn an average of $3000 a month for your entire working life of 40 years. If you were to just invest 10% of your income a month (in this case, it will be $300) into a mutual fund and allow it to compound at 10%, how much would it grow to?

Using a financial calculator, you will see that $300 a month invested at 10% will grow to $1.8 million! And that just from investing $300. If you could invest $1000 a month at 10%, it will grow to nearly $6 million!!

How is this possible? How do small amount of money grow into huge sum? This is the result of the power of compounding. I’m sure you have heard of this term before (I mentioned this in my previous newsletter) but what does it really mean to you?

Compound return is achieved when you invest a sum of money at a particular rate of return. Instead of taking out the interest earned after a year, you add it back to the principal sum and reinvest this larger sum. So the next year, the rate of return is on a larger principal sum. This continues until the returns a year become greater and greater!

For example, say you invested $100 into a fund that gave you an annual return of 20%. At the end of one year, you would have $120. Instead of taking out the RM20 profit, you leave it inside for another year at the same 20%. At the end of the 2nd year, your investment would grow to $144. The next year, it will grow to $172.80 and on the 4th year, it will grow to $207.36!

In less than 4 years, your initial investment has doubled in value!

How long it will take your money to double in value?

Albert Einstein, the greatest genius of our time once remarked that compound interest was the greatest mathematical discovery ever made! He came up with a formula called the Rule of 72. It states that if you take 72 and divided it by the annual percentage return, it will give you the number of years your investment would double!

For example, in the previous case, the percentage return was 20%. So if you take 72 ÷ 20 = 3.6 years you will see your investment of RM100 double to RM200 in 3.6 years.

The power of compounding was Warren Buffet’s secret weapon in creating the second biggest fortune in the world, purely by investing in US stocks. Warren achieved an average annual return of 24.7% for 49 years! This means that his money doubled every 2.9 years (72 ÷ 24.7 ). He turned an investment of $ 100,000 in 1956 into $4,200,000,000 ($4.2 billion) today.

Would you bet 10 cent on a game of golf?

Let me give you another example to further illustrate the power of compounding. Let’s say we played a game of golf and we made a friendly bet of 10-cent on the first hole, with the bet doubling on each hole. Would you take on this bet? Now, if you were familiar with the game of golf, you would know that there are only 18 holes, so how much can the bet be on the 18th hole?

Well, let’s see how the bet increases on the first 9 holes:

At the 9th hole, the bet is $25.60. We are ready half way there, so how much could it be on the 18th hole? $100? $300? $500? Let’s go on…

As you can see on the 18th hole, the bets becomes a whopping $13,107! When given enough time, the power of compounding can turn very small amounts of money into huge sums.

A more important lesson I want to illustrate is that initially, the money grow very slowly. Even at the halfway mark, it is only $25.60. However, the moment it reaches a critical point, the growth becomes exponential! In fact, between Hole 15 and Hole 18, within just 3 holes. It grows from $1,638 to $13,107, a $11,469 difference!

What does this mean to you? You see when you start your investment program of say $200 a month, initially the growth is extremely slow. However, once it hits a certain period of time, the growth explodes exponentially! The trouble with most people is that when they see the slow growth during the first few years, they lose patience and abandon their investment plan. So you must have the patience to wait for the power of compounding to work for you and reward you with millions.

An example of what the graph looks like is shown below. Once again, notice how the phenomenal power of compounding starts off very slowly but starts to grow exponentially once it hits a certain critical point. The chart below shows you how different amounts of investments grow under different rates of return.

(Click to enlarge)

Awesome? Let's start invest and accumulate your wealth now!!

DAVE

How to turn your EPF into a cash generating machine

Before we explore the secret of turning your EPF saving into a powerful cash generating machine, let's understand your EPF in more details.

As you are aware, EPF contributions made by an employee and by his or her employer on behalf of the employee are paid into the employee’s EPF account. Each account comprises two sub-accounts:

• Account 1 comprises savings for retirement at age 55. 70% of contributions are credited to this account.

• Account 2 comprises savings that can be withdrawn for the purchase of a house, mortgage repayments relating to a housing loan, education, medical expenses and/or pre-retirement withdrawal age at age 50. 30% of contributions are credited to Account 2.

Since 1996, under certain conditions, a member is entitled to make transfer from his or her Account 1 balance to an approved unit trust scheme. The latest revision of the withdrawal policy has been enforced on 1st Feb 2008.

The EPF will process a request to transfer an amount from a member’s Account 1 to approved unit trust scheme if:

• The Account 1 is not less than predefined basic saving according to age group (Table 1).


• The member is less than 55 years old.


• An account in the approved unit trust scheme has been opened which the transfer can be processed.


• No transfer has been made in the previous 3 months from the EPF Member’s Investment Scheme.


• The amount eligible for transfer is not less than RM1,000


• The amount to be transferred is not more than 20% of the Account 1 balance remaining after deducting the predefined basic saving (subject to a minimum of RM1,000)
  

Table 1. Account 1 Total Basic Saving

Below are examples in determining whether an account holder is qualify for a withdrawal

After fulfilling all the conditions above, you can start turning your EPF saving into a powerful money making machine for your retirement. Let’s look at the simulation below.

You are 28 year old, being paid for RM3,500 monthly of your job currently and has an accumulative EPF account 1 saving of RM30,000. Assuming that you start investing your EPF saving every year into a unit trust scheme which offered a moderate annual return of 10% for the next 27 years, you will see the result of the simulation below.

(Click picture to enlarge)

You will have an extra of RM 527,120 in your account when you retire at the age of 55! Thanks to the wonder of compounding interest, all this will be achieved passively by just investing 20% of your account 1 balance into a unit trust scheme annually. In fact, you can do this in a much frequent basis which is every 3 months as long as the 20% of your account 1 balance is more than RM1,000.

Let’s look at another scenario which demonstrates a more robust return in a longer period. Assuming you start investing in a unit trust scheme at the age of 25 and the annual return of the UTS is 12.5%.



(Click picture to enlarge)

It is almost 3 million!! A double of the normal EPF saving! Is this real? By a difference of 3 years and 2% of annual return? Well, figures don’t lie, as long as the projection is accurate and you start investing early.

How about if the projection is not accurate and you only able to achieve 8% return every year? Well, let’s look at the simulation again.

(Click picture to enlarge)

Well, you still get an extra of RM 264,307. Not too bad, right?

The learning is simple. By investing your EPF saving into unit trust, you are going to expect an above average return in long run. If you start investing early, the possible return will be very much higher as the effect of compounding interest taken place. Of cause, you will need to invest in good unit trust schemes which managed by professional fund managers. So, what are you waiting for? Let’s kick start and move towards your ultimate dream of financial freedom. Call me for more information.

Bonus gift – download the EPF calculator and run your own simulation! You will know what you are going to get in the future.

Dave

The EAP Experience

I've joined a program called Entreprenuer Action Program 2 weeks ago. It was a great experience as the program was really action based and we were required to accomplish list of given tasks in a group of 6 within a very short period time.

1) Earn net profit of 20k within 2 weeks.
2) Come out with a whole new business idea and present it to the investors.

3) Set up booths in a business opportunity fair to attract crowd and to earn profit.

It was a problem. All of us were total strangers and were not even bother to look at each other before we met. All of us are from different background and we shared no similarities in expertise. And to make things worse, 2 of the members (including me) were not based in KL? How are we going to meet up and get things done??

Nevertheless, we still meet up for a short while, try to figure things out, delegating task after the 2nd day session before I reached Ipoh at 2am Monday morning (Gosh! I still need to attend a company meeting early in that morning). Things weren't going so smooth as expected, we were hit by lots of rejection and disappointment in selling our products and asking for sponsorhip.

It was an obvious depression, doubtfulness and reluctance to carry on with the projects anymore as deadline was approaching. I'm not confident and have no ideas at all how are we going to accomplish the task within a relatively short period of time. Things weren't going as what we've planned! It was just about a week to go and we were stretched out like hell..

Guess what? Yea! You are right! Miracle happened! We finally found 2 sponsors that are willing to work with us to participate in the booth fair and at the same time we've got inspired of an excellent business opportunity to be presented. Thanks to our dedicated team members who had work so hard for all these. I guess this is the spirit of persistence, never give up until the last breath was drawn.

Things had never been as smooth as this after the breakthrough of the bottle neck. We over came one obstacle and another with sheer confidence and determination. Our dedicated sponsors have a big role to play as we were provided with valuable supports in terms of expertise and pyschology. The key learning here is, we mush collaborate with the right partners in order to excel in any business we are venturing. It save us time and gain leveraging.

After days of preparation, the last day of the program was finally unveilled yesterday. We were all dressed up in blue and were the most striking team among the rest. We kicked off the business presentation with a superb power point featuring MJ's Children's theme songs. I still can remember the touching moment when I played the last slides show featuring children's pics and MJ's "We are the world". I'll never forget the moment as thunderous applause from the crowd were filling every corner of the hall. No doubt, we won the best presentation award! (btw, i was the creator of the power point. hehe..)

The program followed by the Business Opportunity Booth Fair in the afternoon. Our booths had the best design and were always busy, our team synergism was always at the peak level and guess what again?? It is very obvious now. Yea! We won the ultimate championship and were awarded RM 4000+ for the team, in real cash!! Isn't this amazing? Never imagined this will happened to us at the begining until we started to visualize our success in high motivation. Thanks to our mentors and sponsors who had guided us through the process. I reached Ipoh at 2.30am without feeling sleepy although i've been staying awake and working for more than 20 hours!!

Few key learning to share with you,

1) Never underestimate yourself

2)Be patience and stay cool even when you are at your toughest moment

3)Choose the right partner to work with and leveraging on their strength

4)Choose the right mentor to follow as they can help you with valuable tips to avoid mistake and accelerate your success.

5)Visualize your dream with sheer determination and you will be the ultimate winner.

Cheers!!

Have you seen Yoyo Phone before?

They're just concept phones for now, but we're guessing the idea could be reused: ModeLabs has created a series of concept phones that run off sustainable energy sources.

One concept phone looks like a yo-yo that hangs around the user's neck and continuously harnesses both solar and kinetic energy using a pendulum and voltaic cells.Knowledge is nothing; power is power. Consumers have lots of wants when it comes to batteries these days — a long life, a quick charge and, increasingly, a sheen of green.

Your True Wealth & Security Lies in Your Mindset And Nobody Can Take This Away From You!

There was a middle-aged gentleman telling his friend that he wanted to re-think and re-plan his life’s strategy as he felt like he wasn’t going anywhere in his career. What frustrated him was that he used to be very successful in school. He was the perfect student who studied hard, got top grades and went to Raffles Institution, Raffles Junior Colleges and to NUS, where he got a first class honors degree.

He did everything by the book and coudn’t understand why he had less success and money than some of his friends who were from lousier schools and had poorer grades. ‘Where did I go wrong?’, he asked himself. He always wanted to change his life but procrastinated for a long time. What really made him take action was that he had enough about working so hard, but always getting passed up for a promotion. What’s worse was that his company (an MNC) was undergoing a restructuring and there was a high posisbility that he may get retrenched. At the age of 43, he had the fear of what he was going to do if it should happen to him. He is looking nowhere for answers.

All of us realized that the world had changed so much since our parents time and the advice they gave us in the past will not only NOT help us succeed, but it may kill us. In the past, change happened slowly and people would work for the same company their entire lives. In the old days, parents gave good advice like, ‘ study hard. Get good grades. find a good job with a good company. do as you are told. don’t rock the boat. the longer you stay and the more loyal you are, your value and pay will automatically increase until you finally get to retire at 50 with a nice secure pension.’

However, the world we live in today is vastly different. Technology and knowledge is changing so fast that 80% of what you learn in school is OBSOLETE by the time you graduate. The nature of jobs are changing so fast that 50% of the jobs that exist today will not exist or exist in a different form 10 years from now. So what does this mean? THis means that when you work for a company today, there is no job or income security anymore. The longer you stay in a company, your value will begin to decline (if you don’t upgrade yourself continously and do things differently). By the time you hit 45-50 years old, there is a 70% chance of being retrenched! Why? becasue your boss will know taht he can hire someone half your age, half your pay, double your energy, doing the same job! And even if you can find another job, it will probably be at a much much lower pay!

Many people who are holding their prestigious degrees and in prestigous positions (Senior managers, Vice-presidents, directors) think they have security. But it is really an ILLUSION of security. Because you do not own your job or your income. Both these can be taken away from us at any time.

So what will give us true income, true freedom and true security? The answer is in continually investing in yourself and upgrading yourself. Your true wealth and security lies in your mindset and your personal mastery skills in being able to continually motivate yourself and overcome adversity. No one can take this away from you! With the right mindset and personals success strategies, you will be able to ride the sea of changes and take charge of the environment, instead of allowing the environment take charge of you! You have to begin to master your mind and design your own destiny (or someone will design it for you)

Strategies to Effective Money Management

Before you can ever reduce your expenses and increase your savings, you must first know where your money is going to. Many people share the same experience of having no idea where their $5,000 salary went. 'How did I spend so much money?' 'I thought that I should have $1,000 left at the end of the month, but it seems to have all disappeared!'

With a simple yet powerful system which I personally use together with specially designed Microsoft Excel templates like the 'Monthly Personal Income Statements' and 'Daily Expense Sheets' you just need to invest fifteen minutes a day to manage your money.

If you want to be wealthy, do not expect it to happen automatically. You must commit to spend time on your finances.

Millionaires spend an average of an hour a day on personal wealth management, while most people spend less than an hour a month, usually on paying bills.

So out of this one-hour a day, you've got to devote the first fifteen minutes to do these five Money Management Steps

1) Always Ask for a Discount

If it is not a fixed price store, there is a 70% chance that you will get a discount if you just ask for it. If you get a 10% discount, it is equivalent to earning an immediate 10% return onyour money. Over the long term, you will save a huge amount that will accelerate you even faster towards your targeted net worth.

2) Always Ask for a Receipt

Always get a receipt so that you can track every single expense at the end of the day and, if possible, claim it as a business expense and get a tax deduction.

3) At the End of the Day, Record all Expenses in your Daily Expense Sheet

You can do this manually in the sample 'Daily Expense Sheet 'at the end of the chapter or you can key it in electronically into atemplate. I highly recommend you key it into an excel spread sheet, so it can automatically add up the total each month.

4) Use a Credit Card Whenever You Can (but always pay the full outstanding sum every month)

Again, this will allow you a convenient way of having all your expenses recorded for you in the monthly statement.

5) At the End of the Month, Update Your Monthly Income Statement

At the end of every month, add up the total expenses from your daily expense sheet and update your monthly income statement. At the same time, update all your income for the month. Deduct your total expenses from your total income to get your monthly savings.

You must use a system to track where every single dollar goes. Only when you know where your money is going, can you take steps to channel it to your savings and investments.

Doing this month after month may seem tedious, but it is absolutely necessary if you want to build your wealth. Only when you develop the habit of managing your personal finances, can you manage the finances of your own business.

So many people financially mismanage their businesses into bankruptcy because they mismanage their own finances. Don't be one of them!

New Business Idea - The Senz Umbrella

Even wonder as Malaysian like us experiencing umbrella blown away by strong wind expecially duing this humid and rainny season. This new invent could probably save us from being soaked in heavy rain.

The SENZ Umbrella has been designed to directly fill a need - to prevent a strong wind from turning an umbrella inside out. The SENZ team has redesigned the umbrella to be both stronger and more aerodynamic. The asymmetric shape keeps the rain from hitting the face, and it acts as a weather vane to help reorient the canopy for maximum protection. The SENZ Original opens up to about one square meter, and the Mini folds down to a typical handbag size.The designers have even addressed the "eye poke effect" from those little metal caps that stick out the sides of conventional umbrellas. SENZ has capped the ends of the umbrella spines with flat and wide plastic disks to protect the ever important eyesight.