Bank is a Four-Letter Word
by Mark W. Roy
The forward the premise:
The evolution of the financial services industry has discovered and brought about a million solutions that are guaranteed to help us and our money in one way or another.
There are financial solutions for Main Street and Wall Street. The revenue streams that flown to and from these services for the programs and benefits that you and your families need can take many shapes and forms. Like the many differences in cars and houses.
The best place to start is with some simple principles and education. I guarantee if you will follow along and investigate for yourself in the various financial ideas and concepts that we will discus in this financial manual that it can help everyone that you know.
We will talk about money and many concepts that you can implement, and we will discuss these things in a simple and straight forward way to make it easy to understand. We will look at how the decisions that you make today can set you on a path toward financial freedom or of financial bondage.
The compounding affects that time has upon everything can be completely overwhelming to say the least. If you continue to procrastinate for years or if you start to take simple steps today this can have an enormous affect on the outcome of your dreams and happiness.
Without further delay will begin in Chapter 1 with the (Power of Compounding Interest).
Chapter 1: The Power of Compound Interest.
There is no new way to define it or to unravel its mysteries. It is generally agreed that the origin of compound interest can be traced back to the Old Babylonian period (ca. 2000–1600 BCE), because we know that the Babylonians called compound interest şibāt şibtim “interest on interest” in Akkadian, and they even solved mathematical problems on it.
There is a simple illustration of this compounding affects of time and money.
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I saw this question the other day, and it reminded me of one of my favorite stories from high school math (yes, that’s pretty nerdy, but this is a personal finance blog).
So, before I tell the story, think about it:
If a genie appeared and gave you a choice, what you would choose: would you rather have a penny today, that doubled every day for a month, or $1 million today?
The fact is a lot of people get caught up in the initial amounts: $1,000,000.00 versus $0.01.
But let’s share the story of The Grain of Rice, a mathematical fable from India.
The Grain Of Rice Fable
Long ago in India, there lived a raja who believed he was wise and fair, as a raja should be. The people in his province were rice farmers. The raja decreed that everyone must give nearly all their rice to him. “I will store the rice safely,” the raja promised the people, “so that in time of famine, everyone will have rice to eat, and no one will go hungry.” Each year, the raja’s rice collectors gathered nearly all the people’s rice and carried it away to the royal storehouses.
For many years, the rice grew well. The people gave nearly all of their rice to the raja, and the storehouses were always full. But the people were left with only enough rice to get by. Then one year the rice grew badly and there was famine and hunger. The people had no rice to give to the raja, and they had no rice to eat. The raja’s ministers implored him, “Your highness, let us open the royal storehouses and give the rice to the people, as you promised.” “No!” cried the raja. How do I know how long the famine will last? I must have the rice for myself. Promise or no promise, a raja must not go hungry!”
Time went on, and the people grew more and more hungry. But the raja would not give out the rice. One day, the raja ordered a feast for himself and his court–as, it seemed to him, a raja should now and then, even when there is famine. A servant led an elephant from a royal storehouse to the palace, carrying two full baskets of rice. A village girl named Rani saw that a trickle of rice was falling from one of the baskets. Quickly she jumped up and walked along beside the elephant, catching the falling rice in her skirt. She was clever, and she began to make a plan.
At the palace, a guard cried, “Halt, thief! Where are you going with that rice?”
“I am not a thief,” Rani replied. “This rice fell from one of the baskets, and I am returning it now to the raja.”
When the raja heard about Rani’s good deed, he asked his ministers to bring her before him.
“I wish to reward you for returning what belongs to me,” the raja said to Rani. “Ask me for anything, and you shall have it.”
“Your highness,” said Rani, “I do not deserve any reward at all. But if you wish, you may give me one grain of rice.”
“Only one grain of rice?” exclaimed the raja. “Surely you will allow me to reward you more plentifully, as a raja should.”
“Very well,” said Rani. “If it pleased Your Highness, you may reward me in this way. Today, you will give me a single grain of rice. Then, each day for thirty days you will give me double the rice you gave me the day before. Thus, tomorrow you will give me two grains of rice, the next day four grains of rice, and so on for thirty days.”
“This seems to be a modest reward,” said the raja. “But you shall have it.”
And Rani was presented with a single grain of rice.
The next day, Rani was presented with 2 grains of rice.
And the following day, Rani was presented with 4 grains of rice.
On the ninth day, Rani was presented with 256 grains of rice. She had received in all five hundred and eleven grains of rice, enough for only a small handful. “This girl is honest, but not very clever,” thought the raja. “She would have gained more rice by keeping what fell into her skirt!”
On the twelfth day, Rani received 2048 grains of rice, about four handfuls.
On the thirteenth day, she received 4096 grains of rice, enough to fill a bowl.
On the sixteenth day, Rani was presented with a bag containing 32,768 grains of rice. All together she had enough rice for two bags. “This doubling up adds up to more rice than I expected” thought the raja. “But surely her reward won’t amount to much more.”
On the twenty-first day, she received 1,048,576 grains of rice, enough to fill a basket.
On the twenty-fourth day, Rani was presented with 8,388,608 grains of rice–enough to fill eight baskets, which were carried to her by eight royal deer.
On the twenty-seventh day, thirty-two brahma bulls were needed to deliver sixty-four baskets of rice. The raja was deeply troubled. “One grain of rice has grown very great indeed,” he thought. “But I shall fulfill the reward to the end, as a raja should.”
On the twenty-ninth day, Rani was presented with the contents of two royal storehouses.
On the thirtieth and final day, two hundred and fifty-six elephants crossed the province, carrying the contents of the last four royal storehouses- 536,870,912 grains of rice.
Altogether, Rani had received more than one billion grains of rice. The raja had no more rice to give. “And what will you do with this rice,” said the raja with a sigh, “now that I have none?”
“I shall give it to all the hungry people,” said Rani, “and I shall leave a basket of rice for you, too, if you promise from now on to take only as much rice as you need.”
“I promise,” said the raja. And for the rest of his days, the raja was truly wise and fair, as a raja should be.
Key Takeaway for Millennials
The key takeaway from all of this should be start investing early and often. The biggest gains and returns always happen later in life. If you start investing in your portfolio today and earn a modest 6% return, that might not seem like a lot of money today.
But in 30 years? Earning a 6% return throughout your life, you’ll start seeing huge returns later in life as you approach retirement.
Remember, investing is a long-term endeavor – you shouldn’t be looking to double your money in 3-5 years. You should be looking to grow your money over time. Remember, the Rule of 72 will guide in you in how long it will take to double.
The Rule of 72 for Investing
Have you heard of the Rule of 72? Maybe if you go back to your college finance class? And even if you did remember it, you probably haven’t thought about it since then – especially in an investing context. However, the Rule of 72 is a great tool that every investor should use – it helps you quickly understand how long it will take for money to double as a certain interest rate.
Yes, scientific and finance calculators, and spreadsheets can all do this – but nothing beats simple math sometimes. Let’s look at how this works.
The Rule of 72
The Rule of 72 is a method for estimating how long it will take for money to double at a specific interest rate. The best way to highlight this is with an example. Let’s say you have $1,000, and you want to know how long it will take to get to $2,000 at 2% interest.
Using the Rule of 72, you can estimate it will take 36 years. You simply take 72 and divide it by the interest rate. That is what makes this rule so amazing, and simple.
The Rule of 72 Applied to Investing
Now that you know the basics of the Rule of 72, you might ask why you should care? I mean, how does that help with investing? We all want our money to double as quickly as possible. As we move ahead the term “compounding periods” will be utilized to break down time and investment returns.
The Rule of 72 in two scenarios — (when it comes to investing):
1. The Impact of Fees: If you want to know how much money your fees are going to take out of your investments, you can take the Rule 0f 72 and divide it by the fee rate. This will show you how many years it will take for fees to eat up half of your investments. For example, if you have a mutual fund that charges 2%, it will take 36 years for fees to reduce the principal by half if the money doesn’t grow. How about that for scary?
2. The Impact of Inflation: You can also use the Rule of 72 to quickly estimate the impact of inflation on your portfolio (or better, the buying power of the earnings of your portfolio). For example, if inflation is 3%, it will take 24 years for the value of $1 to be worth $0.50. You can use this to help you plan your retirement spending. If you plan on retiring in 24 years, you’re going to need about double your current expenses to live off of based on inflation.
It’s important to note that the Rule of 72 is only an estimate. In fact, using my 2% example from above, your money will actually double in 35.003 years.
The Other Rules
That is why some people prefer to use the Rule of 70 or Rule of 69. In fact, if you have continuous compounding, the Rule of 69 in the rule you want to use.
To make things easy, we found this great chart from Wikipedia that highlights the rules in action:
To illustrate the rule of 72 we will start with $10,000 for an investor to put into this savings account that offers 3% interest. Our investor is 30 years old.
So first we must divide 72 by 3% (interest) and we find the answer to be 24 (Years). In our problem we now know that our money will double every 24 years at 3% interest.
Age 30, $10,000 initial investment doubles ever 24 years with 3% interest using the Rule of 72.
Age
30 42 54 66 78
Value:
10K 20K 40K
Age 30, $10,000 initial investment doubles ever 12 years with 6% interest using the Rule of 72.
Age
30 42 54 66 78
Value:
10K 20K 40K 80K 160K
Age 30, $10,000 initial investment doubles ever 6 years with 12% interest using the Rule of 72.
Age
30 36 42 48 54 60 66 72 78
Value:
10K 20K 40K 80K 160K 320K 640K 1,280K 2,560K
Age 30, $10,000 initial investment doubles ever 4 years with 18% interest using the Rule of 72.
Age
30 34 38 42 46 50 54 58 62 66 70
74 ($20,480,000) 74 ($40,960,000)
Value:
10K 20K 40K 80K 160K 320K 640K 1,280K 2,560K 5,120K 10,240K
The Rule of 72 for Investing
You simply take 72 and divide it by the interest rate. That is what makes this rule so amazing, and simple.
• 72/3=24, 72/6=12, 72/12=6.
• At 3% investments doubles every 24 years.
• At 6% investments money doubles every 12 years.
• At 12% investments money doubles every 6 years.
Example A.
Age 30, $10,000 initial investment doubles every 24 years with 3% interest using the Rule of 72.
Age 30, $10,000 initial investment doubles every 12 years with 6% interest using the Rule of 72.
Age 30, $10,000 initial investment doubles every 6 years with 12% interest using the Rule of 72.
Table 1
Age 3% 6% 12%
30 10K 10K 10,000
36 20,000
42 20K 40,000
48 80,000
54 20K 40K 160,000
60 320,000
66 80K 640,000
72 1,280,000
78 40K 160K 2,560,000
Bank is a Four-Letter Word
Outline:
Introduction:
The Grain of Rice Fable
The Magic of Compound Interest
The Rule of 72
Dollar Cost Averaging
Time and Consistency
Personal Debt and the Path to be Free
Home Loans
Credit Cards
Installment Loans
Revolving Credit
Retirement Accounts:
IRA, Roth IRA
401K, 403B,
Annuities
Mutual Funds
Unit Investment Trusts
Stocks
Precious Metals
Education Accounts: 529-Plans
Insurance:
Buy Term and Invest the difference
The Evils of Cash Value Insurance
Homeowners Insurance
Health Insurance
Banks – Overview
Savings Accounts, Checking Accounts , CD’s,
Overdraft Report
The True Cost of Banking Services
Summary:
References
Appendix
Author Biography
By learning and applying a few simple but basic concepts in your daily life, it is amazing how by making only a few informed adjustments on some very important cornerstones and issues in your life the possibilities that can unfold and result from theses changes will blow your mind.
We will illustrate and discuss in this book sound and proven concepts which can, “if applied” create great advantages for all families. It is never too late to learn simple financial fundamentals. The sooner one applies this knowledge into their own lives, and starts down the path of financial independence, the sooner substantial results will be achieved.
It may be just a simple goal of saving an extra $1,000 dollars toward that future goal or dream. Before you can save $25,000 you need to save $1,000. And, before you can get there you will need to set aside $100.
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