Interest rate differences over the time period

Financial Independence, Uncategorized

Last time I showed a graph and calculations of how a doubling of a bet for every cricket wicket or golf hole can make you a millionaire many times over if you allowed to take the bet over a large number of wickets.

The bigger part however is that the real advantage comes as you take the period over a longer term.

This time I will show you how the value of the bet can change the value of your earnings.  As I have repeated many times in my blogs earlier also, the value of money you end up with is has low co-relation to the amount you start with but rather with the duration and the rate of interest.

So this time also we will start with only one dollar to start with and show you how the value of the amount you get depends at the rate at which you grow your bet.  We will consider 8%, 15%, 17% and 24%.  There is a reason for choosing these rates.

Typically a long term bank deposit in India can get you about 8%.  Its almost guaranteed to not fail. So you don’t have to take any risk to get this kind of return.

15% -17% is the average return that the Indian stock market has returned on average.  24% is the kind of lowest return the investing gurus  have been able to generate from the stock market.

Wicket in cricket / hole in golf Rate of interest 8% Rate of interest 15% Rate of interest 17% Rate of interest 24%
1 1.08 1.15 1.17 1.24
2 1.1664 1.3225 1.3689 1.5376
3 1.259712 1.520875 1.601613 1.906624
4 1.36048896 1.74900625 1.87388721 2.36421376
5 1.469328077 2.011357188 2.192448036 2.931625062
6 1.586874323 2.313060766 2.565164202 3.635215077
7 1.713824269 2.66001988 3.001242116 4.507666696
8 1.85093021 3.059022863 3.511453276 5.589506703
9 1.999004627 3.517876292 4.108400333 6.930988312
10 2.158924997 4.045557736 4.806828389 8.594425506
11 2.331638997 4.652391396 5.623989215 10.65708763
12 2.518170117 5.350250105 6.580067382 13.21478866
13 2.719623726 6.152787621 7.698678837 16.38633794
14 2.937193624 7.075705764 9.007454239 20.31905904
15 3.172169114 8.137061629 10.53872146 25.19563321
16 3.425942643 9.357620874 12.33030411 31.24258518
17 3.700018055 10.761264 14.42645581 38.74080563
18 3.996019499 12.37545361 16.87895329 48.03859898
19 4.315701059 14.23177165 19.74837535 59.56786273
20 4.660957144 16.36653739 23.10559916 73.86414979
21 5.033833715 18.821518 27.03355102 91.59154574
22 5.436540413 21.6447457 31.6292547 113.5735167
23 5.871463646 24.89145756 37.00622799 140.8311607
24 6.341180737 28.62517619 43.29728675 174.6306393
25 6.848475196 32.91895262 50.6578255 216.5419927
26 7.396353212 37.85679551 59.26965584 268.512071
27 7.988061469 43.53531484 69.34549733 332.954968
28 8.627106386 50.06561207 81.13423187 412.8641603
29 9.317274897 57.57545388 94.92705129 511.9515588
30 10.06265689 66.21177196 111.06465 634.8199329

If you see the difference between the 8% and 24% rate of interest is 3 times.  However the outcome is 63 times different over 30 units.  If you were to look at an even larger period like say 50 units the difference will come out to be 1000 times.

The human brain is not able to comprehend this major magic of compounding when trying to compute mentally.

Now look at the columns which are with showing you 15% and 17% interest rates.  While the difference is only 2% if you see the outcome after 30 holes at 17% you have earned double then at 15%.  If you were to extend this to 50 holes then the amount at 15% would be 1083 while at 17% it would be 2566. A difference of 2.5 times.  Why am I showing you this.  If you pay 2% commission to someone to manage your investment then you lose that kind of money. 

The people like Warren Buffet or Raamdeo Aggarwal or Mohnish Pabrai have become so exorbitantly rich because they manage their own money and manage it a higher rate of interest for a longer period of time.

However even if you think you cannot manage on your own, its better to get some reputed ETF so that the cost of managing is very low.  Only in cases of some high growth markets look for managers to manage specialised funds.

Another thing you will notice from the table – till about the 4th unit all the values were not very far apart. But see how the 24% chart suddenly breaks into another orbit after the 10th unit and the gap widens so dramatically.

The biggest lesson in this post and the earlier one is however that you need to start at the earliest, with whatever you have and let it compound over a long period of time.

For those of you who are more visually inclined, you can have a look at the chart below

Screenshot 2019-03-24 at 10.53.09 PM

Till next time choose the right interest and keep it for a long long time

Carpe Diem!!!

Compounding & the relevance of period

Financial Independence, Uncategorized

Last time I had written about why human beings are attracted always towards the complex items and don’t understand simple concepts like compounding.

One thing which comes to my mind is the fact that compounding works on 2 key parameters….longer periods of activity(of years in case of money)  and higher rates (of interest in case money).  While the human brain is very good at figuring out things quickly by identifying patterns, it gets completely foxed when complex calculations need to be done.

For the first 4-5 periods of activity, there is no appreciable change if you when you start with small values, because of which it seems that nothing worthwhile is happening.  So if you have started with 1 Rupee after 5 years if you only have got 2 rupees you are not able to comprehend how big the number can become. Its only later that the fun starts taking place.

Look at the table below.  The IPL cricket season is about to start in India and people in India could relate to this idea. It could be wickets in a game of cricket or holes in a game of golf.  We will start with a dollar for every wicket / hole taken in a match and double it for the next one till we take 18 holes in golf or wickets:

Wicket in cricket / hole in golf Amount doubled after every wicket/hole
1 1
2 2
3 4
4 8
5 16
6 32
7 64
8 128
9 256
10 512
11 1024
12 2048
13 4096
14 8192
15 16384
16 32768
17 65536
18 131072

Would you wager a bet with anyone on doubling the amount on each outcome.  You wouldn’t if you see how what starts with just a dollar becomes more than One hundred Thirty thousand dollars.  As a matter of fact Tony Robbins has a post specifically on this idea.

If you were to take this forward to a 22nd wicket/hole can you comprehend the value – it will be …it will be 2 million (20lakhs)….and by the 30th hole it would have become…Half a billion dollars (or 500 crores).

Warren Buffets actual growth of wealth has been after the age of 60 because of this phenomenon.  Its the age of the investments that have enabled the compounding to start playing a role.

Think about it.  If you were to ensure that you were to keep money for your child from the time she is born, you will make her a real rich person by the time she is 45-50 without her doing anything….at all.

For those of you who are more visually inclined pls have a look at the chart below

Screenshot 2019-03-17 at 10.22.33 PM

Next time we will take the same example by comprehending different interest rates and show how the different rates can change the graph.

Till next time.

Carpe Diem!!!

Are you covered to live past 90 years

Financial Independence, Uncategorized

I had gone to Lucknow ( capital of the state of UP in India) last week for celebrating the Golden Anniversary of one of my in-laws.  In their house they have a decent size lawn and also a lot of pots and trees in the garden.

While sitting in the garden, having my coffee I noticed an old man mowing the lawn with a manual lawn mower.  Since you don’t get to see a manual lawn mower too often these days I got talking with my in-laws about it.

That’s when my in-laws mentioned that the gardener was in his 90s and peddled down on a bicycle about 17 km everyday to come to their house and do the gardening. He does gardening in about 5 lawns in the vicinity and spends an hour at each location. He earns about 5000-7000 INR every month- about USD 900 /annum.

The positives from the interaction were that he was so healthy and fit even at 90.  He was able to move large pots around even though I would never be able to lift those plots.  I felt extremely happy to see a 90 year old, so healthy and independent.   I did not get an opportunity to talk to him because I got caught up in some other engagements there.

However it got me thinking, would he want to do this activity if he had the financial freedom. Was he working because he had to earn his daily bread or what were his circumstances at home which pushed him to travel 365 days on a bicycle to earn such a meagre amount.

When I visited Canada in 2017 in one of the department store I saw ladies at the cash counters who in my opinion were more than 70 years working on the basic minimum wage only because they did not have any savings to last them their remaining life. Yesterday I met one of my old colleagues who is now settled in the USA and he mentioned that the official retirement age in the US is now 67.5 years.  So as countries are ageing they are trying to increase the official working age.  But for countries like India where the population is still very young, the increase in retirement age from 58-60 in most cases is still afar cry.

Globally the average age of the people is increasing with better nutrition and medical support. If Dr. Peter Diamandis is to be believed in the next decade the breakthroughs in science will help people live well over a hundred years.  However the working life of an individual is only about 30-40 years while they will have to support themselves without an active income for the next 30 odd years.

Just with pure saving instruments its not feasible to beat inflation and grow your money.  You need to be investing money on a regular basis from a very young age so that the you can get the benefits of compounding.  If you will notice Warren Buffet’s dramatic growth in wealth has been after he crossed the age of 60 because the compounding equation is an exponential equation and as the number of years goes up the impact on your investment is dramatic.  He started investing in his early teens, so close to 70 years of compounding has made one of the richest men on the planet.  At around the same age our gardener is still trying to earn USD 900/- per annum because he did not make investments.

Compounding is such a simple equation that grade 7 students are taught in school mathematics.  However our teachers are not able to show the implications of that equation because what is simple is not always easy to comprehend and most people inspite of knowing it don’t apply it ever.

I would strongly recommend everyone to read the book “The Compoound Effect” by Darren Hardy to see the benefits of compounding in all walks of life.

Use this simple equation to make your life easy for the long run and be secure to live well beyond 90 years.

Carpe Diem!!!

 

India crosses France in GDP

Financial Independence, Uncategorized

MERRY CHRISTMAS!!!

A headline which caught my eye today and a cause for celebration for India and people of Indian origin was this report from the World Economic Forum site.

https://www.weforum.org/agenda/2018/10/the-80-trillion-world-economy-in-one-chart

The chart on this link gives such a concise view of how the break-up of the $80Trillion world economy looks like.

While US is still the largest economy at $19 trillion, China at $12 trillion, is closing in quite fast and is one of the reasons for the spat between US and China.

What needs to be understood that China has a huge population and even a small change in per capita can change the numbers for China dramatically.

Which brings me to India.  In one of my posts almost 6-7 months back I had written how the Indian economy can grow dramatically because of the things the government of India is doing in terms of Direct Benefits Transfer and for doubling of farm wages.  With India’s large and growing young population even a $100 increase in per person income, from $1700/ person, can cause us to cross Germany, Japan etc. in a matter of years.

One of the BigFive consultants had put out a report of countries in terms of their share of the economy in 2050.  And the top 3 economies had India in it. While we have only $2.6 trillion portion of the global economy we are still the fastest growing large economy.

Which brings me to the crux of this post….

While Warren Buffet is betting on the USA and I am not negating him…. I also do have some indirect exposure to the US market…..

I would think if you really want to grow fast, you need to invest in an economy which has the world’s largest democracy.  Irrespective of which government comes to power, the economy moves on……there might be some slow downs but India has both the brain power and the manpower to surge ahead.   Being a stable democracy there is a rule of law.  So companies do get stuck in legal hassles but things do get resolved

By 2030 we would have the youngest population in the world. That will mean the amount of consumption that can take place in this country will be unsurpassed.  With both men and women entering the workplace either directly or indirectly, the need for workplaces will grow and it will put pressure on our existing infrastructure.  Which means that the government will have to be investing in setting up new cities.  The Delhi-Mumbai industrial corridor – being built with Japanese collaboration – is going to sprout more than 10 completely new living and industrial areas.

To transport the population you will need to have airports, roads,  airlines.  To treat such a large population you will need hospitals, medicines etc.  There is no field where growth will not take place at amazing rates.

If you can take ownership of businesses via mutual funds or direct equity investments invest in India.  The growth is just about to begin and if you buy into companies at this time you can ride this growth.  If you want your wealth to grow faster than anywhere else in the world put your money in India.

To your financial independence.

Carpe Diem