Power of Compounding

Today, I will teach you how to be a millionaire. And you're going to realise that being rich has alot more to do with mentality and attitude rather than just having a long line of zeros in your bank account. I will highlight to you the power of compounding...

To show you the power of compounding, I'd share with you a story about golf betting . Ah kao was playing golf with Ah beng and was playing for one dollar a hole. Ah kao won on the first hole, Ah beng then wanted to double the bet at each passing hole to make the game more exciting, because he said 'one dorrar per hole onry, where got fun! I also bored to play seriously!' So they'd double the bet of $1 with every hole. So a golf course has 18 holes, so the first hole would be a small bet of $1, and the second would be $2 and $4 and $8 and so on... small amount isn't it?

Wrong. By the tenth hole, it'd be $512, by the 14th it'd be a whopping $8192! $131072 by the 18th hole! In the end Ah beng still lost, he blamed his stick and ranted in colorful hokkien at his caddy and sweared and cursed in 'french' about the weather and the wind affecting his ball. But no worries, Ah beng was able to pay Ah kao the money because he has his own money management company(loansharks!). The lesson here, dun take doubling bets unless you have to cash to lose!

Put a a dollar into your piggy bank everyday, and in one year you'd have accumulated $365(or $366 in a leap year)! The very basic habit of saving that our parents tried to instill in us in our greener years is the very basis of using the power of compounding to be a millionaire!

So... principle one of being a millionaire, save/invest your money to harvest the power of compounding. 'Save' and 'invest' are used in the same breath here because I believe that saving money in a bank is also a form of investment because you still get interest on capital albeit a much lower return with much lower risks.

Save Save Save! The reason why Asian countries are going on buying sprees in recent times is primary due to the fact that they are net savers(high savings rate as a country) and thus have the cash to acquire falling US companies at dirt cheap prices with the onset of the US recession.

So.... How do we go about saving? Well, as I said at the start that being rich is more about attitude and mindset. The difference between two exact same persons with the same pay would be how they spend their money on payday. The 'rich' would save it and already have a plan on what they want to do with it in the short, medium and long term; the 'poor' would just splurge it on whatever takes their fancy and maybe even stretch their credit, so come the next payday, they'd already be running a deficit from their credit card. Thus the 'rich' would become richer and the 'poor', poorer.

Granted, different people have different circumstances, having said that, I feel that the habit of saving should start somewhere, no matter how small or little. Gurus like Antony Robbins and Robert kyosaki would say, PAY yourself first. Forget about bills, loans, debts, on payday, pay YOURSELF first, take out a certain %, say about 10% and put that into a savings account for investment/savings purposes.

Robbins goes on to explain about the 3 buckets theory where you divide your assets into low risk investments, high risks and your happy bucket where you can use income from investments to buy your wants(which could take a whole posts, and I am meandering off topic!)

So yes, start today! The earlier the better, to let your 1dollar compound into a million!

Diverging the post into other forms of investments.. You know how you get investment brochures saying that their previous returns of 20%, 30%, 50%(saw this in a brochure today)! Well...

Number one thing you learn in finance, past performance is not a good indicator of future returns! (technical analysts may beg to differ, however, there IS a general consensus)

Number two, higher risk=higher returns, i.e. higher returns are MOST definitely likely accompanied with higher risk. Other investment with lower returns may seem less attractive; however taking into account the power of compounding, and ability to achieve consistent returns on account of being less risky means that it would still yield attractive returns over the long run.

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