"Make it your mission to understand & invest wisely. Everyone has the potential to succeed in their search for true wealth & happiness & everyone can be successful in their pursuit of financial freedom." Contrarian Invest

Monday, 3 September 2012

How you can retire on R55,000!

There are many people out there that are afraid to become wealthy & successful. The general population has a love/hate relationship with wealth & success.
They resent those who have it, but spend their entire lives attempting to get it themselves. The reason a vast majority of people never accumulate a substantial nestegg is because they dont understand the nature of money and how it works. See below how Paul manages to accumulate over R1.6m by only investing a total sum of R55,000 over a period of 10 years while Peter accumulated only R1.5m and contributed a total sum of R240,000 over a period of 25 years!

25         5000
26         5000
27         5000
28         5000
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40                         10000
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63                         10000
64                         10000
65                         10000

Total Contributions:          Paul = 55,000                                 Peter= 260,000
Annualised Return a Year:  Paul= 10%                                  Peter= 12%
End Value(age 65):          Paul= R1,616,789                          Peter= R1,503,339
Multiplier (end value divided by contributions): Paul= 29.4  Peter= 5.78

Cash, like a person, is a living thing. When you wake up in the morning and go to work, you are selling a product - yourself (or more specifically, your labor). When you realise that every morning your assets wake up and have the same potential to work as you do, you unlock a powerful key in your life.

Each Rand you save is like an employee. Over the course of time, the goal is to make your employees work hard, and eventually, they will make enough money to hire more workers (cash). When you have become trully successful, you no longer have to sell your own labor, but can live off the labor of your assets and savings.

It is much smarter to start saving earlier in life. Compound interest, which is interest on interest that you have already earned, is a powerful way to grow your money over the long term.

For example (see illustration above), a pair of twin brothers Paul and Peter - both want to save for their retirement.
Paul starts saving R5,000 a year at the age of 25. He saves for 10 years and stops contributing to his savings at the age of 35. Paul earns returns on his savings at a rate of 10% per year. He makes a total contribution of R55,000 to his savings, which are worth R1.6m when he turns 65, due to the effect of compound interest.

Peter, on the other hand, starts savings only at the age of 40 at a rate of R10,000 a year and continues to save until the age of 65. He earns annualised returns of 12% a year on his savings. Even though Peter contributed R260,000 to his savings ( a much higher amount than Paul) and earned a higher return, his investment is worth only R1.5m at the age of 65.

Also bear in mind that for savings to be viable, the saver has to be compensated for inflation, the time value of money after tax. Remember if you plant the financial seeds today you can sit comfortably in the shade tomorrow.

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