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The magic of compounding returns

The Magic of Compounding Returns

Albert Einstein said that compound interest is the greatest mathematical discovery of all time. He discovered the Rule of 72. You may have heard of this term. What is it exactly? The Rule of 72 allows you to calculate how long it will take your money to double at a certain interest rate. This is important to know because you are making money from the interest making interest. This is how it works.

Let’s say you put $25,000 in a fund that earns you 9% per year and that’s all you did. You just left the money in the fund and forgot about it. How long would it take for that $25,000 to double? Through the miracle of compound interest, it would take 8 years for that $25,000 to grow to $50,000.

Rule of 72. Take the 72 and divide it by the interest rate. In this example, take 72 and divide by 9 which equals 8. Let’s do the calculation the long way. Take a pen or pencil and a calculator and follow along on a note pad. See the results for yourself in your own handwriting. It is a far more powerful experience for you to write out the calculations for yourself than to just look at the numbers and take my word for it.

Year 0: Deposit: $25,000 in fund * 9% = $2,250

Year 1: ($25,000.00 + $2,250.00) * 9% = $2,452.50

Year 2: ($27,250.00 + $2,452.50) * 9% = $2,673.23

Year 3: ($29,702.50 + $2,673.23) * 9% = $2,913.82

Year 4: ($32,375.73 + $2,913.82) * 9% = $3,176.06

Year 5: ($35,289.55 + $3,176.06) * 9% = $3,461.90

Year 6: ($38,465.61 + $3,461.90) * 9% = $3,773.48

Year 7: ($41,927.51 + $3,773.48) * 9% = $4,113.09

Year 8: ($45,700.99 + $4,113.09)

Balance: $49,814.08

Voila! Your money has almost doubled in value through the magic of compound interest. Okay, so this may not be earth-shattering news or ringing any bells if your interest rate is at 4%. 72 divided by 4 is 18 years to double your money. Do you want to wait that long to double your money? Not me. When you put your money in the bank, the bank in turn takes your money and invests it. They make 20%, 50%, 100% or more because they have the fund managers who know how to leverage risk for higher gains. Meanwhile they guarantee you a safe 4% return. We can’t all be banks. However, there is a faster way –  through real estate.

For simplicity and for side-by-side comparison purposes, let’s say you used that same $25,000 as a down payment towards a $100,000 house. It appreciates 9%. In Year 1, your house would be worth $109,000.

Year 0: Down Payment: $25,000 for $100,000 house * 9% = $9,000

Year 1: $109,000.00 * 9% = $9,810.00

Year 2: $118,810.00 * 9% = $10,692.90

Year 3: $129,502.90 * 9% = $11,655.26

Year 4: $141,158.16 * 9% = $12,704.23

Year 5: $153,862.39 * 9% = $13,847.62

Year 6: $167.710.01 * 9% = $15,093.90

Year 7: $182.803.91 * 9% = $16,452.35

Year 8: $199,256.26

Eureka! I think you more than doubled your money in 8 years. To calculate the return on investment, take the value of the house at $199,256.26 and subtract the $25,000 cash down payment and the $75,000 mortgage and you get $99,256.26. Divide $99,256.26 by your $25,000 and you get a $397.03% total rate of return. Divide this by 8 years and you get a 49.63% annualized return. This number represents how hard your cash worked for you while invested in real estate. Now let’s compare this to the fund.

To calculate the return on investment in the fund, take the value of the fund at $49,814.08 and subtract the $25,000 cash deposit and you get $24,814.08. Divide $24,814.08 by your $25,000 and you get 99.26% total rate of return. Divide this by 8 years and you get a 12.41% annualized return.

There is a $74,442.18 difference over the same 8 year time frame by using the power of leverage and the power of compounding returns together. Now that’s magic.

If you would like more hands-on learning, you are invited to attend a free upcoming workshop where you will learn how to use the 7 Profit Centers in real estate to educate people and how to apply the law of attraction to manifest the money. Check out my website at www.OnTheBeachEducation.com for event details.

July Ono is a real estate investor, educator and mentor. She is the President of On The Beach Education Corporation and the Founder of the Real Estate Network Group. In 2007, her students purchased over $34 million of investment properties. The Power of Real Estate Program is the best of her experience and expertise that have helped investors grasp the foundation of real estate investing skills and tools to create financial independence for themselves. Accelerate your success and become a team-made millionaire.

www.OnTheBeachEducation.com

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