Interest–Part 3 Rule of 72

 

A quick and easy way to calculate compound interest is using the rule of 72.

In finance, the rule of 72 is used to estimate how many periods the investment will be doubled, given the interest percentage per period.

The formula is very simple

If you can get a 12% interest or return on your investment per year, how many years will you double your money? If you invest Rp 10,000,000, when will it be Rp 20,000,000?

n = 72 / 12

n = 6

So it will take approximately 6 years to double your money or make your investment become Rp 20,000,000.

 

Let’s take another example. If you want to double your money in 3 years, what is the rate of return that you need?

3 = 72 / r

r = 24

So you will need an interest of 24%

 

What is the number if you want to know when your money is tripled? Use Rule of 114

What is the number if you want to know when your money is quadrupled? Use Rule of 144

Remember to use this rule as an ESTIMATE because it is not meant to be exact. It is good for rough calculation that you can use without a financial calculator or spreadsheet.

Learn and Grow!

Inge Santoso, B Com, CFP^®

Interest – Part 2 Compound Interest

Compound interest is interest upon interest. That is, when an interest payment is added to the principal and then the whole thing (principal + interest) earns interest.

How does it work?

If you invest Rp 1,000,000 and the compound interest is 10% a year, then

Year 1 : Rp 1,000,000 + (Rp 1,000,000 x 10%) = Rp 1,100,000

Year 2 : Rp 1,100,000 + (Rp 1,100,000 x 10%) = Rp 1,210,000

Year 3 : Rp 1,210,000 + (Rp 1,210,000 x 10%) = Rp 1,331,000 and so on

 

Compound interest is what can make you rich when you invest. One of the most important elements in compound interest is time. The longer the time, the greater the impact.

That’s why the best time to invest is yesterday!   Since you cannot go back to yesterday, then the next best time is NOW!

 

Perhaps you have heard this story…

One day a father and his son went to play golf. Before they started the game, the father asked his son.

“Son, would you prefer getting a lump sum Rp 50,000,000 or getting Rp 1,000 on the first hole and doubling it for next hole until you reach the 18th hole?”

After thinking for a few seconds, his son said, “Rp 50,000,000, Dad.”

“That’s why you still need to learn, Son. I’ll show you why.”

 

“If you choose doubling that Rp 1,000, at the 18th hole, you will have Rp 131,072,000 and if you total all the money from hole 1 to 18, you will get a sum of Rp 262,143,000. You will get about 5 times more.”

 

What can we learn from this story?

1. It’s OK to start small. The most important thing is to start NOW.

2. When you have more money, save and invest more!

3. You may not be able to get an interest of 100% like in the story, but there are financial instruments that can get you better return than bank saving rate.

 

Learn and Grow!

Inge Santoso, B Com, CFP^®

Interest - Part 1 Simple Interest

When we talk about investment or borrowing money, we need to understand interest.

For most of us, we had learned how to calculate interest when we were at school, but we might not put much attention to it because we were too young to understand its implication. We only learn the mathematical aspect of it without understanding how important it will be when we grow up and start saving, investing or borrowing. 

Today we will learn about SIMPLE INTEREST. Interest is how much you pay for the use of money. If you borrow money, then you pay interest. If you lend or invest money, then you earn interest.

Example 1: If you invest Rp 1,000,000 and the interest rate is 12% a year. How much interest will you get in 3 year?

You will get an interest of = Rp 1,000,000 x 12% x 3 = Rp 360,000                            

The amount of money you will have after three years is

Rp 1,000,000+ Rp 360,000 = Rp 1,360,000.

 

Example 2: If you borrow Rp 5,000,000 and the interest rate is 10% a year. How much you will have to pay if you borrow for 3 years?

You will have to pay back = Rp 5,000,000 + ( Rp 5,000,000 x 10% x 3)

                           = Rp 5,000,000 + Rp 1,500,000

                           = Rp 6,500,000

 

Tomorrow, we will learn about COMPOUND INTEREST.

Learn and Grow

Inge Santoso, B Com, CFP^®

Financial Lessons from Warren Buffett

Source: Best Finance Schools

Wishing Wishy-Washy Wishes

I wish…

• I have more money,
• I have a new car,
• I have a bigger house,
• I have the best smartphone,
• I win a lottery,
• I get a windfall from distance relatives,
• I get a pay raise at work,
• I can travel more,
• etc.

I wish…I wish…I wish…so many wishes, but unfortunately they will remain just wishes.

If you want to your wishes to come true, one of the first things you need to do is to change your wishes to goals. Some of you may have heard SMART goal setting that goals need to be Specific, Measurable, Attainable, Relevant and Timely.

Specific – What do you want? Why do you want it? How are you going to do it? You need to be very clear about what you really want. For example, instead of wishing you have more money, you can set a specific goal of saving 10% of your income or Rp 1M a month.

Measurable – You can quantify your goal and measure your progress. For example, if you want to have a saving of Rp 6,000,000 in a year, then you can measure your progress when you save Rp 500,000 a month.

Attainable – You need to believe that you can achieve this goal. You need to set a goal that is big but not impossible to achieve. For example, if your income is Rp 10M a month, saving Rp 1.5M a month or 15% of your income is attainable. If you say that you will save Rp 5M or half of your income, it will be very hard, especially if you have a family to support. If it is too difficult you are not going to do it, so set a goal that will excite and motivate you to achieve it.

Relevant – How is the goal relevant to your life or purpose? For example, if you say that you want to save Rp 1M a month for a child’s education fund for 10 years, but you do not have a child…then it’s irrelevant. The goal must be meaningful and rewarding for you.

Timely – You set a timeframe for the goal. For example I have Rp 20M of emergency fund by 31st December 2013.

Transform your wishes into goals and start taking action today! 

If you do not mind sharing your goals with us, please share them in the comments! You will be more motivated when you make a public commitment!

Learn and Grow!

Inge Santoso, B Com, CFP^®

Be Prepared for “YES”

When we have lived as frugally as possible, yet the income is still not enough to have a decent lifestyle, then we need to consider increasing our income. One of the ways to increase our income is to sell or to offer our services. Perhaps some of us join network marketing, real estate agency or insurance industry to supplement our income. Although the potential rewards from these industries are high, not many people can stand the work. Trust me…it is not as easy as they say in their business opportunity meetings!

When we are selling or offering our services, we are often met with many objections, rejections until we only expect people to say ‘no’. Sometimes we feel so afraid to make another phone call because we can’t stand to hear another ‘no’. If this happens to you, remember this:

No matter how good your product or service is, there are people who will not buy it; No matter how bad your product or service is, there are people who will buy it.

That’s why when we are moving from one rejection to another, from one objection to another; remember that those rejections and objections will only bring us closer to those people who will buy from us. The no's are stepping stones instead of obstacles in our way to success. Celebrate and learn from the no’s and always be prepared for someone to say ‘YES’!

Wish you all the best in increasing your income!

Learn and Grow

Inge Santoso, B Com, CFP^®

Tips to Put Money into Savings Account

I know some people find it difficult to save money. It’s not because they do not have enough income, but because of their spending habit. When they have money, they just feel like spending them all.

There are many reasons why they do it. For some people, it is because of some traumatic events in the past, upbringing or due to friends’ influence. For some, it is because of their personality type. Certain type of personality such as Influence or Sanguine tends to seek pleasure and want to enjoy things now. They tend to be unorganized and won’t be bothered to track their expenses. (If you want to know more about how personality type can influence your finance, you can attend our seminar “Mastering Your Personality for Financial Freedom”)

These are some tips to help you put money into savings

1. Auto-debit – automatically transfer some money to a separate account straight after you receive your income or salary
2. Pension scheme provided by the company – some of the salary is automatically put into your retirement account and you can only access the account at certain age
3. At the end of the day, take one piece of third biggest denomination of money from your wallet and put it in a jar. At the end of the week or month, deposit that money into your savings account. For example, if there are a few 100K, 50K, 20K and 10K in your wallet, take one piece of 20K (third biggest denomination) and put it away. If you do this for a month, you may get around 500K that you can put in the savings account.
4. When you get some change after paying for something, put the change into a separate wallet and save them. Don’t forget the coins because they can add up. For example, when you pay for 36K lunch using 50K denomination, put away the 14K and save them.

I hope these practical tips can help you put more money into your savings account. Start today! Put into practice and see you much you have saved by the end of the month.

If you have other tips to share, please do so in the comments.

Learn and Grow

Inge Santoso, B Com, CFP^®