Tuesday, September 28, 2010

Things you should not buy brand new

Many people do not know that time and money have a deep relationship.

Time is gold, isn’t it? There is no time machine. It is just a fiction we see in movies and sci-fis. That is why we have “if only”. Value time because you can never bring it back. A time spent is a time lost.

Money is a tool we use in our day-to-day life. We use money to buy our food, rent/buy a house and buy clothings. We work hard for the money. We spend 8-12 hours (or more) working in the office/workplace just to have money. But never people will study how money works.

Why do we need to know how money works?

Because of the following.

Money does not get sick.

Money does not stop working.

Money does not complain.

Money does not go on vacation.

Money works 24 hours a day.

Money works even on holidays.

Money is loyal to its boss. (And the great part of it? The boss is YOU.)

Unfortunately, only few understand these facts.

I’ll give you an example. If paycheck comes, what comes to your mind first? Is it your savings/investments (I mean investments on mutual funds/stocks, insurance coverages, health coverages and emergency fund.) or the latest gadget/jacket/shoes/shirt/toy in the mall? One of the differences of the poor and the rich is the mindset. If you think first of the latest gadget, cool jacket, fancy shoes, trendy shirt or awsome toy then I am sorry to say but you have a poor mindset. You may have lots of money right now to buy those things but time will come you will lose every peso you have because you have not developed the value of saving and investing.

Here are some manifestations of a poor mindset.

If the paycheck comes, it’s a signal for them to spend.

They value comfort over success.

They want instant gratification.

They are afraid to take risk.

They think they know it all.

Question: Are you one of them?

Now, if you are NOT willing to take the plunge then stop reading. Otherwise continue.

I’ll give you a detailed discussion on how money works and how you can achieve your dream using this concept.

The Rule of 72.

The Rule of Compounding Interest or Rule of 72 is said to be the greatest mathematical discovery of all times. This was formulated by Albert Einstein. This rule simply shows us how long our money will double given a specified interest rate. 72 is a constant number divided by the interest rate will give the number of years the money will double.

If you have 100 thousand pesos in a bank right now, how long will it take your money to double itself? (Without you adding a single peso to that account.) Now here is the tricky part and I’ll try my very best to discuss it in the simplest way I can. Determine the interest rate of your bank. (As I write this article the interest rate of the bank is 0.75% - not considering tax) But let us simplify it. We will compute with 1% interest rate. Let us now divide 72 by 1. The answer will be 72, meaning it will take 72 years more before our money will double. If you are 25 years old right now and you have 100 thousand pesos in a bank right now then your money will be 200 thousand when you reach the age of 97. Apply it to any interest rate and you will have an idea of what I am saying.

For Example: At 4% interest rate per annum your money will double every 18 years.

If you are 29 years old right now and you have 100 thousand pesos in a facility earning 4% per annum your money will be 400 thousand when you reach 65.

What if you put your money in a facility which earns 8% per annum? Using the rule of 72, your money will double every 9 years. If you have 100 thousand right now, assuming you are 29 years old, your money will become 1.6M.

What if you know 12%? Then your 100 thousand will become 6.4M after 36 years.

~till then

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