My young Engineer once wondered aloud: "When will I ever earn my first Million dollar". He started using his salary and multiplying the number of years to reach one Million dollars. He told me he needs about 25 years. I told him that is only "revenue". He hasn't factored in his "cost" which is his expenses. Furthermore, inflation rate of about 4% per annum needs to be factored in. So, in reality, he will never be a Millionaire in his life. And even if he is, 25 years later, that amount is only worth half the amount today.
The scary reality about inflation which many people tend to neglect is that it is compounding. Your wealth is eroded by 4% every year and that is compounding at an exponential rate. There is a simple rule called Rule of 72 which could help you estimate how much long today's 1 Million Dollars is eroded by inflation to half its value. If you take "72" divide by the rate of annual return, it would give you the number of years it takes a value to become double or half. Take for example: "72/4%" = 18 years. This means it will take 18 years for $1M to be eroded to $500,000 (in today's value)in 18 years if the inflation rate is 4% per annum.
On the other hand, Rule of 72 helps you to estimate the number of years it takes to double your wealth based on your achievable annual return rate. Take for example, if you manage to find an annual return rate of 10%, it would take 72/10% = 7.2 years to double your investment. The power of compunding interest is that every dollar you earned from interest is re-invested into the capital. This simple technique gives a powerful exponential growth to your investment.
The scary reality about inflation which many people tend to neglect is that it is compounding. Your wealth is eroded by 4% every year and that is compounding at an exponential rate. There is a simple rule called Rule of 72 which could help you estimate how much long today's 1 Million Dollars is eroded by inflation to half its value. If you take "72" divide by the rate of annual return, it would give you the number of years it takes a value to become double or half. Take for example: "72/4%" = 18 years. This means it will take 18 years for $1M to be eroded to $500,000 (in today's value)in 18 years if the inflation rate is 4% per annum.
On the other hand, Rule of 72 helps you to estimate the number of years it takes to double your wealth based on your achievable annual return rate. Take for example, if you manage to find an annual return rate of 10%, it would take 72/10% = 7.2 years to double your investment. The power of compunding interest is that every dollar you earned from interest is re-invested into the capital. This simple technique gives a powerful exponential growth to your investment.
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