I’m sure some of us will be making substantial profit on our holdings of MVIS stock in the year 2010.
I hope you are aware of Long Term Capital Gains Tax going up from 15% in 2010 to 20% in 2011.
Today is the last day to purchase Microvision stock so that when you sell some on the last trading day of 2010… you will still qualify for the 15% rate.
This is from Wikipedia…
“In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income, but the tax rate for individuals is lower on "long-term capital gains," which are gains on assets that had been held for over one year before being sold. The tax rate on long-term gains was reduced in 2003 to 15%, or to 5% for individuals in the lowest two income tax brackets (See progressive tax). Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. The reduced 15% tax rate on eligible dividends and capital gains, previously scheduled to expire in 2008, has been extended through 2010 as a result of the Tax Increase Prevention and Reconciliation Act signed into law by President Bush on May 17, 2006 (P.L. 109-222). In 2011 these reduced tax rates will "sunset," or revert to the rates in effect before 2003, which were generally 20%. President Obama's budget, announced on February 25, 2009, calls for the Capital Gains Tax to be reverted to the 20% rate before the Sunset date of 2011.”
Its not a bad idea to buy today and sell on the last day of 2010 and pay only 15% Long Term Capital Gains Tax.
Anant Goel
http://www.wealthbyoptions.com/
Showing posts with label millionaire. Show all posts
Showing posts with label millionaire. Show all posts
Thursday, December 31, 2009
Wednesday, December 23, 2009
Wealth: Creation and Preservation
There are many proven ways to create wealth in our global economy. And I mean the legit ways of creating wealth… and not by the unscrupulous ways of “Madoff” of this world.
“Long term wealth is created by high rates of consistent returns accumulated over a period of time─ with prudent use of leverage, and allowing time for the compounding of gains to do their magic in creating wealth of legacy proportions.”
So, what differentiates one type of investment from the other?
Well if you are diversifying, and I strongly recommend that you do, then what matters is the allocation of investment funds across the various asset classes… like real estate, bonds, stocks, and a family business that gets passed from one generation to the next. Since each asset class has its own rate of investment returns, therefore time horizon for growth to create wealth will vary from few years to several decades.
I know what you’re thinking!
You want to be wealthy early in your lifetime to be able to enjoy the fruits of your labor and your good fortune. That makes sense. I mean, what good a billion dollars would do you at age 90?
So, what it boils down to is the speed of wealth creation so that we can enjoy the fruits of our lifetime of labor… during our lifetime. And that’s where the “high monthly rate of return” comes into play…
“Wealth creation of legacy proportions is the miracle of high monthly rate of return, compounding and leverage.”
It is, therefore, understandable why our strategy focus is on exceptional long term growth and earning monthly income while we wait for long term growth to unfold …
“We invest in companies that ride the wave of change or bring about a paradigm shift with lasting and exceptional long term growth. We hold our core position, unless the fundamentals change, and ignore the short term gyrations. During volatile periods, we limit the down side by buying or selling options and do not trade for the sake of few pennies earned from scalping the market. However, from time to time, we may buy calls or sell put premium to leverage core holdings... or to utilize the available portfolio margin to earn risk free income by selling OTM puts/calls... with probability skewed in our favor at 80:20.
High monthly returns are possible due to our ability to control risk and avoid getting trapped in positions that run counter to long term macro-economic or current business trends.”
Having stated our wealth creation [investment] strategy, now we go looking for companies that ride the wave of change or bring about a paradigm shift. In the past, we have had the good fortune of finding a few diamonds in the rough and made some exceptional rate of return with companies like Intel, Microsoft, Dell Computers, Cisco, Qualcomm, Google and Apple.
The high-growth train of the 1980s and 1990s has already left the station, and some of us were left behind, muttering obscenities to ourselves on the platform. We have two choices facing us today in 2010. One option is to mourn our bad fortune, admit that high-growth stocks demand too much hard work and more than a bit of luck, and then resign ourselves to index funds, hoping to eke out 7% per year over the next 20 years. The other option demands boldness and vision. It asks you to forget the past and plan for the future by joining in the search for the great companies of the next 20 years.
Technology, for one example, is rapidly evolving and from time to time the opportunity of a life time stares you in the face, only if you have your ears to the metal and have an open mind.
After trading over a billion dollars in stocks and options over a 27 year period, I have discovered one technology company that is on its way to bring about a paradigm shift in the way we entertain; communicate; collaborate; and network with friends, families and business associates. And yes, while we wait for our investment in this hyper growth company to unfold, we are also generating over 10% income per month [on the risk capital] on a consistent basis... with risk controlled investment strategies that leverage portfolio margins.
Search for Hyper Growth:
Searching for hype growth companies is an on-going process and currently I see another paradigm shift taking place in the technology arena… the prime mover of business and life style changes in our lifetime. Besides technology, the other prime movers of business [and life style] changes would be the “peak oil”, “permanent demand destruction”, and “carbon footprint”. There is “nano technology”, but that is obviously covered under technology.
For now we will focus on technology and discuss the others at another place and time.
Stay tuned for Part 2... it will be here beore you know it.
Anant Goel
http://www.wealthbyoptions.com/
“Long term wealth is created by high rates of consistent returns accumulated over a period of time─ with prudent use of leverage, and allowing time for the compounding of gains to do their magic in creating wealth of legacy proportions.”
So, what differentiates one type of investment from the other?
Well if you are diversifying, and I strongly recommend that you do, then what matters is the allocation of investment funds across the various asset classes… like real estate, bonds, stocks, and a family business that gets passed from one generation to the next. Since each asset class has its own rate of investment returns, therefore time horizon for growth to create wealth will vary from few years to several decades.
I know what you’re thinking!
You want to be wealthy early in your lifetime to be able to enjoy the fruits of your labor and your good fortune. That makes sense. I mean, what good a billion dollars would do you at age 90?
So, what it boils down to is the speed of wealth creation so that we can enjoy the fruits of our lifetime of labor… during our lifetime. And that’s where the “high monthly rate of return” comes into play…
“Wealth creation of legacy proportions is the miracle of high monthly rate of return, compounding and leverage.”
It is, therefore, understandable why our strategy focus is on exceptional long term growth and earning monthly income while we wait for long term growth to unfold …
“We invest in companies that ride the wave of change or bring about a paradigm shift with lasting and exceptional long term growth. We hold our core position, unless the fundamentals change, and ignore the short term gyrations. During volatile periods, we limit the down side by buying or selling options and do not trade for the sake of few pennies earned from scalping the market. However, from time to time, we may buy calls or sell put premium to leverage core holdings... or to utilize the available portfolio margin to earn risk free income by selling OTM puts/calls... with probability skewed in our favor at 80:20.
High monthly returns are possible due to our ability to control risk and avoid getting trapped in positions that run counter to long term macro-economic or current business trends.”
Having stated our wealth creation [investment] strategy, now we go looking for companies that ride the wave of change or bring about a paradigm shift. In the past, we have had the good fortune of finding a few diamonds in the rough and made some exceptional rate of return with companies like Intel, Microsoft, Dell Computers, Cisco, Qualcomm, Google and Apple.
The high-growth train of the 1980s and 1990s has already left the station, and some of us were left behind, muttering obscenities to ourselves on the platform. We have two choices facing us today in 2010. One option is to mourn our bad fortune, admit that high-growth stocks demand too much hard work and more than a bit of luck, and then resign ourselves to index funds, hoping to eke out 7% per year over the next 20 years. The other option demands boldness and vision. It asks you to forget the past and plan for the future by joining in the search for the great companies of the next 20 years.
Technology, for one example, is rapidly evolving and from time to time the opportunity of a life time stares you in the face, only if you have your ears to the metal and have an open mind.
After trading over a billion dollars in stocks and options over a 27 year period, I have discovered one technology company that is on its way to bring about a paradigm shift in the way we entertain; communicate; collaborate; and network with friends, families and business associates. And yes, while we wait for our investment in this hyper growth company to unfold, we are also generating over 10% income per month [on the risk capital] on a consistent basis... with risk controlled investment strategies that leverage portfolio margins.
Search for Hyper Growth:
Searching for hype growth companies is an on-going process and currently I see another paradigm shift taking place in the technology arena… the prime mover of business and life style changes in our lifetime. Besides technology, the other prime movers of business [and life style] changes would be the “peak oil”, “permanent demand destruction”, and “carbon footprint”. There is “nano technology”, but that is obviously covered under technology.
For now we will focus on technology and discuss the others at another place and time.
Stay tuned for Part 2... it will be here beore you know it.
Anant Goel
http://www.wealthbyoptions.com/
Monday, March 9, 2009
A Millionaire for the Price of a Donut and Cup of Coffee
© Anant B. Goel
“The difference between a millionaire and poverty lies in a person's determination to succeed, savings habit and power of compounding.”
You see your neighbors always dressed in designer clothes, frequently eat at fancy restaurants, order bottles of top-shelf wines, and have midsummer night's dream party in their manicured backyard. Eyeing their shiny, silver SUV in the driveway and their new kitchen and family room addition, you think, "How can they afford that? What am I doing wrong?"
Anxiety over how our financial lives compare to others' is a well documented natural human reaction and is the subject of a recent book, "Green with Envy: Why Keeping Up with the Joneses is Keeping Us in Debt," by journalist Shira Boss. "How we fit in and how we measure up are such an integral part of our financial well-being," she says. "We construct a fantasy world around those who have more money, and glorify their lives."
However, more and more people around us truly seem to be living the good life -- at least in a material sense -- thanks partly to the democratization of credit and unprecedented levels of consumer debt. This prompts increasing speculation about how they can afford it. The reality is simple: Some of them can't, at least not without going into debt. But on the other hand, many have really become financially wealthy by frugal savings and investing wisely.
In this country of ours, there is no reason why everyone can't retire a millionaire. This is quite a sad thought when one stops to consider that the majority of people that are retired are doing so below poverty levels. It is time to take your future and destiny into your own hands and not be one of those poor souls looking back on life at all the squandered possibilities with a handful of “what ifs?” The time to start is now. Cut back, for example, on that “Donut and a Starbuck Coffee” every morning, and treat yourself to the ultimate gift – a secure future as a millionaire.
The biggest mistake most people make is that they think they have to start with tens of thousands of dollars to make big money. They suffer from the "not enough" mentality; namely that if they aren't making $1,000 or $5,000 investments at a time, they will never become rich. What these people don't realize is that entire armies are built one soldier at a time; so too is their financial portfolios.
Someone once told me, this is a true story, how this 30 year old man who saved about $3.50 dollars a day by foregoing that “Donut and Cup of Coffee” a day and became a multi-millionaire when he retired at age 50. This man saved $3.50 per day despite it never being more than a few dollars at a time. Now, his portfolio is worth millions upon millions of dollars, all of which was built upon small investments. I am not suggesting you become this frugal, but the lesson is still a valuable one. Do not despise the day of small beginnings!
In this article, we're going to touch on three subjects simultaneously: saving, determination, and the power of compounding. Summed up, this is a wake-up call to achieving your goals of financial independence. Hopefully it will serve to assist in regaining your focus on the big picture, should you become distracted.
Having gone through the process myself and practiced the art of saving and investing for over 20 years, I found one primary question kept rising time after time, namely “How much money do I need to get started in trading or investing?” As a matter of fact, it was the belief that the individual may not have enough money to start with that often prevents them from ever getting started. The old adage that “it takes money to make money” is only partially true. More often than not it is throwing fear aside and getting started that is the catalyst to success.
The best way to illustrate how small savings, determination to succeed and the miracle of compounding can make you rich is to recreate the success story of this 30 year old that became a multi-millionaire when he retired at age 50. The story goes, as I recall, this 30 year old started out by saving a few dollars here and there to simply scrape up the $2,500 minimum necessary to open an options margin account, hardly a hefty sum compared to many. He went on to learn stock and derivatives trading and scrimped and saved for 12 months to get that amount of $2,500 going. He quit smoking cigarettes and cut back on his daily Donut and Coffee in order to achieve his goal of saving $2,500 (talk about determination!). He also cut back on lunches at work, opting to pack a lunch rather than go out. But within his allotted time frame he managed to get the money together and accomplish his goal. His mantra was a quote by Mahatma Gandhi: "Every worthwhile accomplishment, big or little, has its stages of drudgery and triumph; a beginning, a struggle and a victory."
He then started trading small. He learned the stock and derivatives trading strategy by which he could make an estimated 3% a month with very little risk compared to most stock trades. He had his share of growing pains and an occasional surprise loss; however, he did not give up and continued to strive for knowledge and education wherever he could find it.
About 10 years after he took off with his maiden trade, he had surpassed the $200,000 mark and kept going strong. You see, this type of success is possible for almost anyone who has the determination, will power, and patience. He certainly sped up his learning curve by years by attending on-line investing courses and learning about trading tools, but he had the drive to succeed that I have found to be more important that brains, genetics, background or luck. After a few bull and bear markets, I last heard he was now up to over $7 million in about 20 years effort. Not bad for someone using $2,500 in savings to open an account and just adding $100 dollars a month [the cost of a Donut and Coffee per day] for the next 20 years!
Another key ingredient to his success was that he did not let the greed factor take over his psyche. You must have a certain amount of greed and desire for success to want to learn trading options. But he never started to get the lottery or Vegas mentality to take over his judgment. As long as you know that the lottery, Vegas or impulsive trades are simply a tax on people who are bad at math, you should stay humble. The key for him, as for Warren Buffet and you, is compounding.
Compounding is just a fancy word for the profits you make on the profits made on the original principal. Albert Einstein once said, "The most powerful force in the universe is compound interest." Compounding is the key to financial success as a conservative trader. Warren Buffet does not sell his stocks, but rather hedges with options, as he does not want to pay capital gains tax that would lower his compounding rate of return.
If you are just starting to trade, undecided about trading or are already well off but want more, take this simple example as a motivational tool by which to visualize your future, and make it happen. No matter how strapped for money you are, if you have $2,500 in starting capital and can save $3.50 a day, you too can become a multi-millionaire in a few years time. Depending on what statistic one uses, the average return for a passive investor sitting on stocks is 12% a year. However, with a little knowledge about trading, covered calls, and other option strategies you should have little trouble bumping this number up conservatively to 3% a month. You would be surprised at what this comes to. A mere $3.50 a day is more than $100 a month saved. I know people who somehow manage to fritter away more than $100 a day some days, and regularly spend over $100 a month on beer and cigarettes. But saving $1,200 a year (that’s less than $3.50 a day) it is possible by everyone if you want your goal of becoming a multi-millionaire bad enough.
Save $3.57 a day x 7 days a week = $100 a month
+ additional $100 saved a month
= $200 per month
x 12 months in a year
= $2,500 approximate
Do the Math:
With your yield of 3% per month and with a monthly deposit of $100 and with an initial savings amount of $ $2,500, you are looking for a Final Amount of $7 million in about 20 years. Keep reading and you will see how?
Time Value of Money:
One of the fundamental principles of finance is the concept that $1 today is more valuable than $1 a year from now. The reason for this is two-fold. First, a dollar will probably buy less goods and services in the future due to the destructive force of inflation. Second, if I have the dollar in my hand today, I can invest it and earn a return in the form of dividends, interest or capital gains.
I have used the above example to help illustrate this point. Let’s assume that you are determined to become a multi-millionaire in the next 20 years, have a starting capital of $2,500, you found a way to save $3.50 a day and have taken some time out to learn how to invest in stock derivatives to conservatively make 3% a month on a consistent basis, then you truly are on your way.
Using one of the time values of money formulas, you can calculate the real economic cost of not investing the small amount of cash on regular basis.
Here’s the formula…
FV = PV * (1 + i )N + PMT * [ ( ( 1 + i )N - 1 ) / i ]
FV = future value (maturity value)
PV = present value
PMT = payment per period
i = interest rate in percent per period
N = number of periods
To perform the calculation, you have to make a few assumptions. First, let’s assume that you are 30 years old (and hence 20 years away from becoming a multi-millionaire at age 50). It also means that the initial investment of $2,500 and a monthly saving of $100 per month will compound for 20 years. Therefore, we will substitute 240 months [20 years] for “n” in the equation.
Next, we must establish your expected rate of return. Historically, the stock market has returned 12%. If you want to invest in bonds, your return will be lower. Assume that you invest in a combination of conservative stock derivatives strategy and expect to earn a 3% rate of return per month. This will be substituted for the “i” variable in our equation as 0.03.
The “PV”, or present value, is the value of the single amount you want to invest (in this case $2,500). The “PMT”, or payment per period, is the monthly investment [in this case $100] that you have managed to save from cutting out your morning Donut and cup of Coffee.
Now that we’ve figured out the variables, the formula looks like this: FV = $2,500 (1+.03)240 + $100 [((1+.03)240 -1)/.03].
This is how you do it on your calculator…
Enter 1.03 into your calculator (this is the sum of 1+.03). Raise this to the 240th power. The result is 1,204.85. Multiply the 1,204.85 by the “PV” of $2,500. The result ($3,012,130 and change) is the true value of investing wisely the $2,500 today.
Now, let’s calculate the future value of saving and investing $100 per month for the next 20 years. Enter 1.03 into your calculator (this is the sum of 1+.03). Raise this to the 240th power. The result is 1,204.85. Subtract 1 from 1,204.85 to get 1,203.85. Divide 1,203.85 by 0.03 to get 40,128.34. Multiply the 40,128.34 by the “PMT” of $100. The result ($4,012,840 and change) is the true value of investing wisely the $100 per month for the next 20 years.
Now add the two figures [$3,012,130 plus $4,012,840] to get a total of $7,024,970. Even if you adjust for inflation, it would probably work out to be over $3 million in today’s dollars.
Clearly, this $7 million dollars in 20 years may not be enough to retire but armed with this knowledge, you are free to make an economic decision; namely, would you prefer to have your “Donut and Starbuck Coffee’ every morning or have over $7 million in the bank in the future. The answer is entirely personal. Once you understand this concept, however, it becomes painfully obvious that the small luxury items you think nothing of are really costing you millions and millions of dollars in future wealth.
I hope this article served its purpose by helping you to appreciate the value of small savings, determination to succeed, the miracle of compounding, and firmly establish this time value of money concept in your head. The key to financial prosperity is realizing the potential value of every dollar that comes into your hands. In fact, I think of cash as a seed – you can either eat it (spend it) or invest it (sow it).
It is time to take your future and destiny into your own hands. The time to start is now. Cut back on some of the Christmas spending, give-up smoking, or cut back on those Donuts and Starbuck Coffee and treat your-self to the ultimate gift – a secure future. Get some education on investing, learn a few trading tools and forget the excuses for not starting now.
“Human beings, by changing the inner attitudes of their minds, can change the outer aspects of their lives.” By William James
Anant B. Goel
www.wealthbyoptions.com
“The difference between a millionaire and poverty lies in a person's determination to succeed, savings habit and power of compounding.”
You see your neighbors always dressed in designer clothes, frequently eat at fancy restaurants, order bottles of top-shelf wines, and have midsummer night's dream party in their manicured backyard. Eyeing their shiny, silver SUV in the driveway and their new kitchen and family room addition, you think, "How can they afford that? What am I doing wrong?"
Anxiety over how our financial lives compare to others' is a well documented natural human reaction and is the subject of a recent book, "Green with Envy: Why Keeping Up with the Joneses is Keeping Us in Debt," by journalist Shira Boss. "How we fit in and how we measure up are such an integral part of our financial well-being," she says. "We construct a fantasy world around those who have more money, and glorify their lives."
However, more and more people around us truly seem to be living the good life -- at least in a material sense -- thanks partly to the democratization of credit and unprecedented levels of consumer debt. This prompts increasing speculation about how they can afford it. The reality is simple: Some of them can't, at least not without going into debt. But on the other hand, many have really become financially wealthy by frugal savings and investing wisely.
In this country of ours, there is no reason why everyone can't retire a millionaire. This is quite a sad thought when one stops to consider that the majority of people that are retired are doing so below poverty levels. It is time to take your future and destiny into your own hands and not be one of those poor souls looking back on life at all the squandered possibilities with a handful of “what ifs?” The time to start is now. Cut back, for example, on that “Donut and a Starbuck Coffee” every morning, and treat yourself to the ultimate gift – a secure future as a millionaire.
The biggest mistake most people make is that they think they have to start with tens of thousands of dollars to make big money. They suffer from the "not enough" mentality; namely that if they aren't making $1,000 or $5,000 investments at a time, they will never become rich. What these people don't realize is that entire armies are built one soldier at a time; so too is their financial portfolios.
Someone once told me, this is a true story, how this 30 year old man who saved about $3.50 dollars a day by foregoing that “Donut and Cup of Coffee” a day and became a multi-millionaire when he retired at age 50. This man saved $3.50 per day despite it never being more than a few dollars at a time. Now, his portfolio is worth millions upon millions of dollars, all of which was built upon small investments. I am not suggesting you become this frugal, but the lesson is still a valuable one. Do not despise the day of small beginnings!
In this article, we're going to touch on three subjects simultaneously: saving, determination, and the power of compounding. Summed up, this is a wake-up call to achieving your goals of financial independence. Hopefully it will serve to assist in regaining your focus on the big picture, should you become distracted.
Having gone through the process myself and practiced the art of saving and investing for over 20 years, I found one primary question kept rising time after time, namely “How much money do I need to get started in trading or investing?” As a matter of fact, it was the belief that the individual may not have enough money to start with that often prevents them from ever getting started. The old adage that “it takes money to make money” is only partially true. More often than not it is throwing fear aside and getting started that is the catalyst to success.
The best way to illustrate how small savings, determination to succeed and the miracle of compounding can make you rich is to recreate the success story of this 30 year old that became a multi-millionaire when he retired at age 50. The story goes, as I recall, this 30 year old started out by saving a few dollars here and there to simply scrape up the $2,500 minimum necessary to open an options margin account, hardly a hefty sum compared to many. He went on to learn stock and derivatives trading and scrimped and saved for 12 months to get that amount of $2,500 going. He quit smoking cigarettes and cut back on his daily Donut and Coffee in order to achieve his goal of saving $2,500 (talk about determination!). He also cut back on lunches at work, opting to pack a lunch rather than go out. But within his allotted time frame he managed to get the money together and accomplish his goal. His mantra was a quote by Mahatma Gandhi: "Every worthwhile accomplishment, big or little, has its stages of drudgery and triumph; a beginning, a struggle and a victory."
He then started trading small. He learned the stock and derivatives trading strategy by which he could make an estimated 3% a month with very little risk compared to most stock trades. He had his share of growing pains and an occasional surprise loss; however, he did not give up and continued to strive for knowledge and education wherever he could find it.
About 10 years after he took off with his maiden trade, he had surpassed the $200,000 mark and kept going strong. You see, this type of success is possible for almost anyone who has the determination, will power, and patience. He certainly sped up his learning curve by years by attending on-line investing courses and learning about trading tools, but he had the drive to succeed that I have found to be more important that brains, genetics, background or luck. After a few bull and bear markets, I last heard he was now up to over $7 million in about 20 years effort. Not bad for someone using $2,500 in savings to open an account and just adding $100 dollars a month [the cost of a Donut and Coffee per day] for the next 20 years!
Another key ingredient to his success was that he did not let the greed factor take over his psyche. You must have a certain amount of greed and desire for success to want to learn trading options. But he never started to get the lottery or Vegas mentality to take over his judgment. As long as you know that the lottery, Vegas or impulsive trades are simply a tax on people who are bad at math, you should stay humble. The key for him, as for Warren Buffet and you, is compounding.
Compounding is just a fancy word for the profits you make on the profits made on the original principal. Albert Einstein once said, "The most powerful force in the universe is compound interest." Compounding is the key to financial success as a conservative trader. Warren Buffet does not sell his stocks, but rather hedges with options, as he does not want to pay capital gains tax that would lower his compounding rate of return.
If you are just starting to trade, undecided about trading or are already well off but want more, take this simple example as a motivational tool by which to visualize your future, and make it happen. No matter how strapped for money you are, if you have $2,500 in starting capital and can save $3.50 a day, you too can become a multi-millionaire in a few years time. Depending on what statistic one uses, the average return for a passive investor sitting on stocks is 12% a year. However, with a little knowledge about trading, covered calls, and other option strategies you should have little trouble bumping this number up conservatively to 3% a month. You would be surprised at what this comes to. A mere $3.50 a day is more than $100 a month saved. I know people who somehow manage to fritter away more than $100 a day some days, and regularly spend over $100 a month on beer and cigarettes. But saving $1,200 a year (that’s less than $3.50 a day) it is possible by everyone if you want your goal of becoming a multi-millionaire bad enough.
Save $3.57 a day x 7 days a week = $100 a month
+ additional $100 saved a month
= $200 per month
x 12 months in a year
= $2,500 approximate
Do the Math:
With your yield of 3% per month and with a monthly deposit of $100 and with an initial savings amount of $ $2,500, you are looking for a Final Amount of $7 million in about 20 years. Keep reading and you will see how?
Time Value of Money:
One of the fundamental principles of finance is the concept that $1 today is more valuable than $1 a year from now. The reason for this is two-fold. First, a dollar will probably buy less goods and services in the future due to the destructive force of inflation. Second, if I have the dollar in my hand today, I can invest it and earn a return in the form of dividends, interest or capital gains.
I have used the above example to help illustrate this point. Let’s assume that you are determined to become a multi-millionaire in the next 20 years, have a starting capital of $2,500, you found a way to save $3.50 a day and have taken some time out to learn how to invest in stock derivatives to conservatively make 3% a month on a consistent basis, then you truly are on your way.
Using one of the time values of money formulas, you can calculate the real economic cost of not investing the small amount of cash on regular basis.
Here’s the formula…
FV = PV * (1 + i )N + PMT * [ ( ( 1 + i )N - 1 ) / i ]
FV = future value (maturity value)
PV = present value
PMT = payment per period
i = interest rate in percent per period
N = number of periods
To perform the calculation, you have to make a few assumptions. First, let’s assume that you are 30 years old (and hence 20 years away from becoming a multi-millionaire at age 50). It also means that the initial investment of $2,500 and a monthly saving of $100 per month will compound for 20 years. Therefore, we will substitute 240 months [20 years] for “n” in the equation.
Next, we must establish your expected rate of return. Historically, the stock market has returned 12%. If you want to invest in bonds, your return will be lower. Assume that you invest in a combination of conservative stock derivatives strategy and expect to earn a 3% rate of return per month. This will be substituted for the “i” variable in our equation as 0.03.
The “PV”, or present value, is the value of the single amount you want to invest (in this case $2,500). The “PMT”, or payment per period, is the monthly investment [in this case $100] that you have managed to save from cutting out your morning Donut and cup of Coffee.
Now that we’ve figured out the variables, the formula looks like this: FV = $2,500 (1+.03)240 + $100 [((1+.03)240 -1)/.03].
This is how you do it on your calculator…
Enter 1.03 into your calculator (this is the sum of 1+.03). Raise this to the 240th power. The result is 1,204.85. Multiply the 1,204.85 by the “PV” of $2,500. The result ($3,012,130 and change) is the true value of investing wisely the $2,500 today.
Now, let’s calculate the future value of saving and investing $100 per month for the next 20 years. Enter 1.03 into your calculator (this is the sum of 1+.03). Raise this to the 240th power. The result is 1,204.85. Subtract 1 from 1,204.85 to get 1,203.85. Divide 1,203.85 by 0.03 to get 40,128.34. Multiply the 40,128.34 by the “PMT” of $100. The result ($4,012,840 and change) is the true value of investing wisely the $100 per month for the next 20 years.
Now add the two figures [$3,012,130 plus $4,012,840] to get a total of $7,024,970. Even if you adjust for inflation, it would probably work out to be over $3 million in today’s dollars.
Clearly, this $7 million dollars in 20 years may not be enough to retire but armed with this knowledge, you are free to make an economic decision; namely, would you prefer to have your “Donut and Starbuck Coffee’ every morning or have over $7 million in the bank in the future. The answer is entirely personal. Once you understand this concept, however, it becomes painfully obvious that the small luxury items you think nothing of are really costing you millions and millions of dollars in future wealth.
I hope this article served its purpose by helping you to appreciate the value of small savings, determination to succeed, the miracle of compounding, and firmly establish this time value of money concept in your head. The key to financial prosperity is realizing the potential value of every dollar that comes into your hands. In fact, I think of cash as a seed – you can either eat it (spend it) or invest it (sow it).
It is time to take your future and destiny into your own hands. The time to start is now. Cut back on some of the Christmas spending, give-up smoking, or cut back on those Donuts and Starbuck Coffee and treat your-self to the ultimate gift – a secure future. Get some education on investing, learn a few trading tools and forget the excuses for not starting now.
“Human beings, by changing the inner attitudes of their minds, can change the outer aspects of their lives.” By William James
Anant B. Goel
www.wealthbyoptions.com
Subscribe to:
Posts (Atom)