Friday, November 12, 2010

Investment - Start earlier, more beneficial

What is investment about? If we learn investment earlier, and start earlier, we get more beneficial.

From a blog that I followed, he used an example of comparing two different people, say A and B, who start investing at different time.

Let’s say an ideal investment (no brokerage fee, no lost, merely interest), assume it’s 10% of interest per year.

A invests RM1,000 annually at age of 20 for 10 years, (so total investing is RM1,000 x 10 = RM10,000) and get 10% annually until 55 years old. By using simple calculation,

Age 20: 1,000.00
Age 21: 1,000 x 1.1 + 1,000 = 2,100.00
Age 22: 2,100 x 1.1 + 1,000 = 3,310.00
Age 23: 3,310 x 1.1 + 1,000 = 4,641.00
Age 29: 13,579.48(from Age 28) x 1.1 + 1,000 = 15,937.42
Age 30: 15,937.42 x 1.1 = 17,531.17 (After 10 years, stop putting money)
Age 31: 17,531.17 x 1.1 = 19,284.28
Age 55: 19,284.28 x (1.1)^24 = 189,945.04
A uses a capital of RM10,000 (10 years of investing RM1,000 in) and get RM189,945.04

B invests RM1,000 annually at age of 30 up to 55 years old, (total investing amount is RM1,000 x 26 years = RM 26,000). Let's see the difference.

Age 30: 1,000.00
Age 31: 1,000 x 1.1 + 1,000 = 2,100.00
Age 32: 2,100 x 1.1 + 1,000 = 3,310.00
Age 33: 3,310 x 1.1 + 1,000 = 4,641.00
Age 39: 13,579.42 x 1.1 + 1,000 = 15,937.42
Age 40: 15,937.42 x 1.1 + 1,000 = 18,531.17 (continue investing 1,000)
Age 41: 18,531.17 x 1.1 + 1,000 = 21,384.28
Age 54: 88,497.33 x 1.1 + 1,000 = 98,347.06
Age 55: 98,347.06 x 1.1 + 1,000 = 109,181.80
The total amount B invests is RM26,000, and get RM 109,181.80.

A uses RM10,000 and gets RM189,945.04 at age 55.
B uses RM26,000 and gets RM109,181.80 at age 55.
Why is there difference? The 10 years time between A and B causes this. A starts age 20, and B starts at age 30. The interest they compound is different.

For case A,
(189,945.04-10,000)/10,000 = 17.99
17.99/36years = 0.50 or 50% per year
A gets 50% of return per year.
A uses RM1 to earn RM17.99.

For case B,
(109,181.80-26,000)/26,000 = 3.20
3.20/26years = 0.12 or 12% per year
B gets 12% of return per year.
B uses RM1 to earn RM3.20.

See the difference? Why is there difference? B uses higher capital but get less return than A? It's because of the time difference, where A starts 10 years early. During the 10 years, the interest compounded has been exceed the value of B invested. That is what the title of this blog want to tell, start earlier to get more beneficial.

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