Hello there! Welcome back! Last time, we’ve learned that the first principle of wealth accumulation is that we reap what we sow both metaphorically – in our subconscious, and physically – in the world.
Today, we are going to talk about the second principle of wealth accumulation. It is, like the first, quite apparent in our experience, although we probably just take it for granted. It is true that anything big comes from something small. This applies, too in the accumulation of wealth.
Everyone in the Philippines is familiar with the santol tree or cottonfruit. The ones I used to climb when I was growing up were huge. But we know how little the seed of santol is. A thumb is bigger than it. Yet this small seed of santol, or of any tree for that matter, would someday become a huge tree.
The same is true with our savings. We start with something small. Eventually, it will just grow into a huge investment. Financial advisors are wont to talk about the rule of 72. They say that if you want to know how long will it take for your money to double, all you need to do is find out at what rate of interest it is invested on.
As an example, if you have 10,000 pesos invested on a certificate of deposit earning 8%, you should take 72/8, and you will have 20,000 pesos in 9 years. If you have 500,000 pesos you will have 1,000,000 pesos in nine years.
But I don’t have 10,000 pesos you may say. It’s alright. Anything big comes from something small. What you are going to do is start saving monthly or bi-weekly depending on how often you get paid. How much you gonna save would depend on how much you’re earning as well as why you’re saving. As a rule of thumb, it is a good idea to save at least 10% of what you earn. But if you have a bigger goal and shorter time, then you can save perhaps 40% or 50%. It’s all up to you.
This brings us to the two things that we must have to be successful in our investment or savings: time and discipline. We have mentioned these in the first issue of this newsletter. The more time we have and the more disciplined we are in following through with our plan, the more successful we will be in achieving our goal. The easier way to do this is to set up an automatic deduction from our payroll with our employer. Most employers have savings plan for their employees, but if this isn’t available, don’t be dismayed. You can still set up something where a portion of your pay goes directly to you savings account or investment vehicle of your choice. Should you go for the latter, you may need to talk to a financial advisor.
Do you know that if you’re paid 10,000 pesos a month and decide to save 1,000 pesos a month, (10%), and invest it on something that would earn you 8% interest, in 9 years, you will have 157,431.58 pesos? This is the power of compounding. Your principal will keep on earning interest and the interest will earn interest, too. In 26 years you will have 1,042,411.12 pesos. So, if you start at 25 years of age, at 51, you will be a millionaire. Of course, you can become a millionaire at a younger age should you be able to find an investment vehicle that will make your money grow by more than 8%.
We hope that this simple strategy would inspire you to start saving and give you confidence in your financial future. Money is not everything but it does solve a lot of problems.