Last week we had Women’s day. There were a lot of articles on women empowerment, how women have broken glass ceilings etc. While a lot of women today have become very capable leaders with very high education, we still don’t teach our daughters, sisters, lady colleagues on the simple concepts of creating wealth for themselves.
While general principal’s of compounding remain constant for everyone, for women there are certain nuances which women face depending on the stage of life they are in.
However the biggest mind-block I have seen with women is that they think investments, finance are related to maths and a lot of them think they are not capable of doing financial planning. It could be because they were not good in maths and therefore cannot understand the nuances of investments. They would rather leave it to their father or husband.
In this post I will talk about a girl who’s just finished her education and has decided to go for a job and she thinks marriage is 5-7 years away. She may have taken a loan for her education or has done her basic education and wants to fund her higher education on her own so that she does not need to take a large loan.
Now inspite of whatever I write, the first thing to keep in mind is don’t do anything which causes you to lose your sleep. Having said that however be a little open to trying new things. Maybe just that one new thing that you try may change your life dramatically.
So I will talk of just 3 simple concepts to keep in mind
1. Rule of 72 – everyone of you has a calculator. All you have to do is remember that this magic number can tell you everything about doubling your money.
If you know the amount of interest that an investment is giving then you know the approximate time it will take to double your money.
a. Your savings bank deposit gets about 3% annual interest. So if you have 100 in your account and you don’t touch it for one year then at the beginning of the next year you will have 103. At this rate of interest if you want to find how long it will take to double and make the amount 200 you just take your calculator and divide 72 by 3 to get 24. So if you don’t withdraw the money from your bank for 24 years you will have 200 in your bank.
b. Banks also have fixed term deposits where they give 6-7% annual rate of interest…suppose you were to put the same 100 in such a deposit you would need to divide 72 again by 6 and in 12 years you get 200
2. Rate of interest – which brings us to the second important item which is rate of interest. The bigger is the number by which you divide 72, the lesser is the amount of time to get to double your money. Which means higher the interest rate you will take less time to double your money. Generally speaking you need to keep one thing in mind….as the interest rate starts climbing higher the amount of risk that you take with your money is also higher.
3. Identify your goal – if you don’t have your goals defined you are not be able to define what is the right amount of distribution of investments that you need to make. Then use the following graph to map to your goal.
So if you are this young girl who wants to say go for her MBA after getting a work experience of 4-5 years and you need USD 50000/- as an example. The brown line on the map is the number of years you have for your goal and the blue line shows the kind of interest you need. So on the yellow line plot the 5 years and on the blue line straight above the 5 corresponds to about 15% interest. So if you need to get USD 50000/- in 5 years from now and you get an investment which is giving you 15% interest then USD 25000/- invested today will give you USD 50000/-, 5 years from now.
Now lets use the same picture and see what happens if you are only getting interest rate of 10%, then on the blue line check for 10 and then put a pencil on the brown line right below 10 and it will show you it could take you seven and half years. So now you may need to save more than 38000/- dollars so that 5 years from now you will have close to USD50000/-.
You will see that in the picture while the blue line goes as a straight line, the brown line is non-linear. This is something we will explore in a later post.
Till next time …. Carpe Diem!!!!