How Wealth Accumulates Part 2

In an earlier post, we looked at how your P1000 a month, beginning at age 25, can snowball into more than P5 million when you retire at 65. Of course, this is made possible by this "magic" we call compound interest wherein your earnings become part of your principal as your P1000 a month rolls.

Simply stated, the compounding process works this way: If you put your P1000 in an interest-bearing instrument, say at 10%, after one year it becomes P1100. If you do not withdraw your money and its earnings and let it stay there for another year, it becomes P1210. If left for another year, it becomes P1331. After 10 years that your money is allowed to compound, it becomes P2593.74, a gain of 1593.74, as compared to a total simple interest gain of P1000.

Let's take another look at the way it works. Let's establish another treshold - this time, an accumulation goal of P1 million. How much monthly savings will you need to accumulate P1 million given a time frame? The following table will lead us to the amount corresponding to the interest we choose:

Monthly Deposits Required to Accumulate P1 million

Accumulation Period -----6%-----------------8%----------------10%--------------12%

15 years--------------------3439---------------2880--------------2422-------------2002
20 years--------------------2164---------------1689--------------1324--------------1011
25 years--------------------1443---------------1045--------------- 759--------------532
30 years---------------------996----------------666----------------446--------------286

So if you are 30, and you wish to know how much to save to make P1 million at 60, you will have to determine first your period of accumulation by subtracting your age from 60. So 60 minus 30 will give you 30. And if you select 10% as your interest earnings, your monthly outlay is P446. Amazing, isn't it? Question: How easy or difficult is it to set aside P446 a month?

Compounding is like rolling a small snowball down the slope. As it rolls, it gathers and accumulates snow and grows bigger and bigger until it reaches a point where it is lodged or wedged. The longer it rolls, the bigger the snowball. (Of course, the slope has a lot to say as to whether the snowball will roll to a smooth stop as a giant ball or will blow to smithereens. This will the the topic of a future post.)

That's the way with money, or instruments representing money, such as bank accounts, mutual funds, investment trusts, deposit certificates and investment-linked insurance contracts, which have the ability to earn given a certain period of time.

Other forms of wealth, such as real estate or jewelries or antiques or artworks, exhibit their accumulating quality over a period of time through value appreciation. Properties appreciate in value by virtue of progress or development, as in the case of real estate, or on account of increases in the market prices of the items due to demand or due to inflation, as in the case of portable possessions.

All of the forms take into consideration the critical element of time. There are no shortcuts. The longer the period we have for accumulation, the bigger the wealth we can accumulate.

When we consider this time element, and factor in the human physiology of evolving and receding, we begin to see the importance and urgency of getting started with our wealth program the sooner we can.

Truly, there is no time for waiting! The time to begin was yesterday.