Do you know about compound interest?
Over the weekend, I had a great lunch meeting with one of my partners and we sort of talk about what we can achieve in 5 years time. My partner is a very successful businessman with a liquid asset of more than $2 million, impressive for a 33 year old man with not a high education.
His said to me that he would increase his net worth by $500,000 in 5 years time and told me that it was a realistic target. Well, this is where I am good at; I opposed to his target and told him that I could help him increase his liquid asset by $1 million at the end of 5 years.
At first he thought that I was talking about his business but I convinced him that I will increase his net worth with what he has. To my surprise, my partner does not believe in investment. He believes only on ‘parking’ his money on the bank because he is sure that his money will not be gone.
I laughed so loud upon hearing what he said and told him that he forget everything about inflation. In Singapore, the inflation rate is going at 2.6% as at 30th September 2007 and it will increase. On the other hand, banks are offering only 5% interest. in short, he will only earn a 2.4% interest yearly. In 5 years time, the $2 million that he has will only be at $2.27 million.
After hearing what I said, he ask me to propose to him an investment that do not have much risk and still give reasonable returns. I then told him that he should invest his money in unit trust as this kind of investment is safe as the funds are diversified, managed by a team of professionals and perfect for beginners.
I told him that with the right investment skill which I will train him, he will be able to have at least an interest rate of 13% after subtracting inflation rate. With this rate, his $2 million will be at $3.68 million after 5 years. The moment I said this, he eyes almost pop out and asks me to tell him how I arrived at this figure. Well, the answer is simple, power of compounding.
His said to me that he would increase his net worth by $500,000 in 5 years time and told me that it was a realistic target. Well, this is where I am good at; I opposed to his target and told him that I could help him increase his liquid asset by $1 million at the end of 5 years.
At first he thought that I was talking about his business but I convinced him that I will increase his net worth with what he has. To my surprise, my partner does not believe in investment. He believes only on ‘parking’ his money on the bank because he is sure that his money will not be gone.
I laughed so loud upon hearing what he said and told him that he forget everything about inflation. In Singapore, the inflation rate is going at 2.6% as at 30th September 2007 and it will increase. On the other hand, banks are offering only 5% interest. in short, he will only earn a 2.4% interest yearly. In 5 years time, the $2 million that he has will only be at $2.27 million.
After hearing what I said, he ask me to propose to him an investment that do not have much risk and still give reasonable returns. I then told him that he should invest his money in unit trust as this kind of investment is safe as the funds are diversified, managed by a team of professionals and perfect for beginners.
I told him that with the right investment skill which I will train him, he will be able to have at least an interest rate of 13% after subtracting inflation rate. With this rate, his $2 million will be at $3.68 million after 5 years. The moment I said this, he eyes almost pop out and asks me to tell him how I arrived at this figure. Well, the answer is simple, power of compounding.
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