The Power of Compound Interest: Magic behind the growth of money.

 By: Somuah Francis Kofi

      

Albert Einstein was once asked about the most powerful thing in the world and he said compound interest.

 

On the subject of compound interest, Professor Stephen Adei once said, “it is unfortunate when we are being taught compound interest at school, we had to memorise the formula (A=P (1+r) ^t). It is criminal to teach mathematics that way. If your teacher had taught you that understanding compound interest can help you to become a billionaire, your eyes would have popped with interest.”

  

The story of Manhattan

In the early 1600s, the American Indians sold an island, now called Manhattan in New York, for various beads and trinkets worth about $16. Since Manhattan real estate is now some of the most expensive in the world, it would seem at first glance that the American Indians made a terrible deal. Had the American Indians, however, sold their beads and trinkets, invested their $16 and received 8% compounded annual interest, not only would they have enough money to buy back all of Manhattan, they would still have several hundred million dollars left over. That is the power of compound interest over time.

Taking this concept to small amounts of money in our daily lives can produce significant savings for us over time. For example, let's take the change in our pockets at the end of each day. Let's assume that it adds up to about a cedi a day and you place that into your ‘money box’ or piggy bank. That cedi a day will become ¢7 in a week and ¢30 at the end of the month if you continue to empty your change into your ‘money box’ or piggy bank each day.

At the end of the month, you take this ¢30 and place it into a good investment vehicle which earns averagely 10% a year (some products even return about 40% averagely). That cedi a day will be worth close to ¢68,000 in 30 years and that's just pocket change. Make a few adjustments in your spending habits and look at the results.

The next time you're walking down the street and you see a pesewa on the ground, don't think of it as a pesewa. Pick it up, place it into your ‘money box’ or piggy bank to invest and congratulate yourself for finding money for your future.

The principle of compounding suggests that, we need to start investing early because the longer the time you have to compound, the higher the returns. The best time to begin investing is now!!!.

In his presentation at the 2003 Eagles Camp, Rev. Daniel Ogbarmey Tetteh said, compounding is a very interesting concept since it is the ‘magic’ behind the growth of money.

The Psychology of Wealth Creation Through Investment

I have come across many people in my life who always complain of; there is no money in our pockets, the economy is bad. You come across people who have retired and find life very difficult. These people have worked very hard and had earned good and fat salaries. Their life after retirement is full of frustrations and nothing to write home about. Many students out there complete school in huge debt. These include those who did not let a pesewa of the student’s loan to pass by. I do not mean the student loan is bad. If you have genuine reasons, go ahead and take it. Some students apply for it and misuse it. It is not advisable to leave school in debt, leave as a wealthy person. Do not let us repeat the mistakes they did but we should rather learn from their mistakes. These problems can be overcome by the “Psychology of Wealth Creation through Investments.”

I want to define three key words in my article: ‘WEALTH’, ‘CREATION’ and ‘INVESTMENT’.

Wealth is defined as a great quantity of store of money, valuable, possession, property or other riches including a good name, character and information. It must be noted that being wealthy cannot be equated to being rich. When we talk about wealth, we are not talking about little money here and there, and being able to live until the end of the month or having some treasury bills here and there. That is not what we are talking of; we are talking of having an abundant store of resources or possessions in the form of money, land, mansions; like Bill Gates 43 billion U.S. dollars and Mr. Abramovich’s 8.3 billion U.S. dollars. One great author (name forgotten) defined wealth as “How long you will continue to live after all your income ceases”. In other words, how long the money you have amassed will sustain you after you decide to work no more. Is it one week, one month, a year or generations? The answer is in your hands. It is my dream and prayer that a day will come in this country when someone will break the ceiling. Amen. We must take note that wealth is created. This takes us to the next key word.

Creation. To create is to cause something into existence not through natural evolution, but from ones own thought or imagination as in invention. This definition is important for the concept of wealth creation. Wealth creation entails the use of ones own thought and imagination to work in order to bring something extraordinary that produces great quantities of money. Therefore, wealth creation is working with your mind or thinking faculty to produce something unique that will produce great quantities of money and property. It is essential to note that wealth creation is a gradual process. Wealth is not made in a day. I guess we have all heard or come across these sayings; ‘Little drops of water make a mighty ocean’, ‘A journey of one thousand miles begin with a step’, ‘Rome was not built in a day.’ Wealth is therefore accumulated over time. This ideology of accumulating wealth over time in order to create it leads us to the next key word.

Investment. This is one of the major instruments of wealth creation. There can be dubious ways of creating wealth; robbery, illegal trading activities like drug peddling. This is not what we are talking about. Remember from the definition of wealth, I said that, wealth includes a good name, character and information. This is when investment comes in. Investment involves putting away money to preserve the value and at the same time earn a return (profit) on the amount invested in the future. Simply, investment is the outlay of money in instruments for future return (profit). Note that investment should preserve the value of the principal amount invested and at the same time earn further return (profit) beyond preserving the value of your principal amount. This makes investment different from savings, which does not preserve the value of your principal. Investment is done for future gain and this is how wealth is created. Wealth is created over a long period. Investment can be short term and long term. Our emphasis would be on the long term since if you really want to create wealth, then you must invest into the long term. These include purchase of financial assets such as stocks or shares, bonds, or investing in long term mutual funds. We can also invest in consumer durables like land, mansions.

The question then is ‘How do I get money to invest in order to create wealth?’ since the target of my audience is the student population, I will focus on students.

As youths and students, our major source of income is from the monies our parents give us (‘chop monies’) to spend at school.

In my quest to encourage my colleagues to invest, one major thing they used as an excuse was ‘the money I am given to school is not enough; it does not even cater for my expenses’. I assure you that there is a way through if only we are ready to follow these basic steps.

RATIONALISE YOUR EXPENSES

Expenses have a way of creeping up so it is crucial to take a hard look to ensure that you keep it to the barest minimum. As students, we are often fond of impulse buying. We should always ask ourselves this question before we purchase any consumable. Ask yourself, if I do not buy this attire, what will happen to me. If you will walk naked on the streets, go ahead and buy it. On the other hand, if it will only increase the quantum of clothes in you wardrobe or earn the cheers of your friends, which will cease after some few days, then please you would have to take a second thought. Simply cut down your expenditure (expenses) and increase your revenue (income).

DON’T CONSUME ALL YOUR SEEDS (MONEY)

You are said to be consuming all your seeds when you do not make a conscious effort to put aside some of you seed (money). The example of the wealthy people should inspire you. For them they invest their money or income first before and spend what is left. Spending your money before you invest is not a laudable idea. Pay your self first; your investment should be the first of your expenses.

ASSESS YOUR WASTE LINE

We need to explore a more efficient way in going about our activities in order to accumulate wealth. Some areas of common waste that come to mind, as a student is the use of mobile phones; sending text messages as opposed to making calls would definitely be cheaper. Let us be mindful of the little expenses we make on daily basis. Benjamin Franklin said, “Because

of  the little expenses, a small leak will sink a great ship”.

PREPARE AND OPEN YOUR MIND

Do not make your mind that investment is for the rich. Every body can invest. Remove all standing blocks that prevent you from investing. Mental preparedness is the first step to begin investing. These standing blocks include what I call the ‘foolish man sayings’; I am too young to invest; my money cannot cater for my expenses how much more investing; investment is risky. Never say, “I don’t have money to invest, say how can I get money to invest.” It is very true that risk is associated with investment. Nevertheless, there is even a risk of not investing, which is ‘inflation’. So you see, it is rational to take a risk by investing than to take a risk by not investing. Therefore, A riskier investment is safer than a safe consumption. Do not see investment as dangerous, it can only be risky. I see Risk as just a deviation from your expectation.

INCREASE YOUR FINANCIAL LITERACY

It is said that, you can distinguish the poor from the rich by their vocabulary. The rich is more financially inclined than the poor. Learning a vocabulary in finance and investment a day can add value to your self which will help you ply the path of financial independence. Read a lot of investment books and articles attend seminars, and listen to the business news to widen your scope on wealth creation through investment. Speak to any of the experts for advice. A Chinese proverb has it that, ‘A simple conversation across the table with a wise man is worth a month’s study of books.’

OPEN AN INVESTMENT ACCOUNT          

Visit any of the sixteen brokerage firms nation wide to open an investment account today to begin the road map of wealth creation now for a brighter and secured future. Just opening an investment account is a stepping stone for more to come and it even boosts your morale or drive s you to do more. I would advice parents to open accounts in trust for their kids to make regular contributions to better and enhance of the child. To the youth and every body, the time to act is NOW!!!