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Stock Investment – Money Investment – Drip – and Calculate Compound Interest Using Excel
The power of compound interest is very powerful that every investment institution is using it in one way or the other. That is the reason these institution are able to hold investments running into billions of dollars. Unfortunately, the common man seems not to be conversant with the power of compound interest or he/she is not interested. If one would learn and practice to use the power of compound interest, then chances are high that his investment will grow large enough to march those of the largest institutions in the country. Getting rich or accumulating wealth is not a secret that you do not know, only that for some, compound interest may just be another boring thing whilst to others this may be the miracle to wealth – but it requires enough time and dedication.
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Invention of the Wheel
One of man’s oldest and most important inventions was the wheel which was invented about 5000 years before Christ. The wheel has helped man leverage his work performance by being able to use a wheel or a lever to gained mechanical advantage. Money investment is no different. If you can be able to save a dollar out of every three dollars you make, and have that one dollar saved be working for you, then it will not take long before you realize you are headed to having a lot of money. Earning money is one thing but do you think of how that money you have earned will work for you?
Stock Investment or Save Money in a Bank
You can save money in a bank where they pay you interest, you can also save your money in a cooperative society where they pay you dividends. You can also buy stocks where at the end of the year they will pay you dividends. One of the most feared things about saving your money in a bank is loss of purchasing value regardless of whether they pay you interest. An example is in 1990 you put $5,000 in a bank which becomes $8,500 by 2010. In 1990 you could have bought one acre of land at $5,000 but by 2010 you will sell the same acre of land for $20,000. The other option is that you could have had $5,000 in 1990 which you spent by having a good time somewhere with someone else, and by 2010 you have nothing to show for it. All these three options are good, and the most important thing is to take action. Spending your money by having good time somewhere with someone else is good because life is about living a happy and enjoyable life. Living a happy and enjoyable life is spending money and should not be confused with money investment. Money investment is all about your money working for you.
If you worry too much about inflation, then you may never invest your money. If inflation is a big problem to you, try investing in stocks. Look for a few stocks in good companies that pay dividends every year. Buy and hold those stocks for as long as you project your investment should take. At no time should you ever sell your stocks at prices lower than the prices you paid for them. Every month set a fixed number of additional stocks you add to your portfolio. An example would be at the age of say 20 years old you buy 100 shares of company XYZ at $10 each for $1,000. Every month when you get your salary buy 5 more shares for $50. Continue to do this for the set period of your investment, say 20 years. Whenever company XYZ pays you dividend, reinvest those dividend by buying more shares of company XYZ. The good thing about investing in stocks is that stocks grow in capital gains that will cushion against inflation. One good thing about realized capital gain is that it is taxed at a lower rate. Examples of investments sold at a profit from capital gains include the stocks, mutual funds, bonds, options, collectibles, real estates and homes.
What to Look for When You Invest Your Money
In summary, there are about four major things to look for when you invest your money:
1. A good compound interest rate. A compound interest rate from 6% is good.
2. An investment that has capital gain to cushion against inflation
3. An investment that will allow you make a monthly contribution to add on the principal amount invested
4. An investment that pays dividends that should be reinvested back into the principal investment. Look for safe Dividend Reinvestment Plan (DRIP) in your area.
What is Dividend Reinvestment Plan – DRIP?
A Dividend Reinvestment Plan - DRIP is a plan offered by large companies or corporations that allows small investors to reinvest their cash dividends back into the corporation by buying additional shares. These shares can be fractional shares if your dividend amount is not enough to buy a full share. In most cases, the reinvestment in the DRIP plan should be at least $10. A Dividend Reinvestment Plan - DRIP is a very good plan to increase the value of your investment.
The Rule of 72
When your investment involves principal amount and compound interest rates, the calculations involved falls under complex equations that may not be easy to calculate for the ordinary investor. There is a simple rule that is used in estimating out how long it would take your principal amount invested to double. It is called the rule of 72. What you need to know is only the compound interest rate. Then divide 72 by the compound interest rate to get the number of years your money will take to double. Let’s say you want to invest your $5000 in a saving that pays 9% compound interest rate per year and you want to find out how long it will take for your $5000 to become $10,000. The answer is 72/9 = 8 years.
Rule of 69
The rule of 72 uses 72 because it is easy to divide 72 by 2, 3, 4, 6, 8, 9 and 12 which are the most common rates of compound interest rates in the market. The most accurate estimate is obtained by using 69.32 which is referred as rule of 69. These figures of 69 and 72 are being used because somewhere in the calculation there is loge(2) which is Ln(2) which is 0.6932.
Formula for Calculating Compound Interest
This is the formula: FP = OP( 1 + i )ª
Where FP is the final principal including interest earned
OP is the original principal
“i”is the compound interest rate
“a” is the number of years your money is invested.
Calculate Compound Interest Using Excel
To find out your total amount of money you have saved after a certain number of years of investment using compound interest rate, you can use MS Excel to calculate the final principal as follow:
1. Open excel spread sheet and input the original principal in column A1 say “5000”
2. Input compound interest rate in column B1 say 9% as “0.09”
3. Input number of years in column C1 say “8”
4. Get your final principal by inputting in column D1 the following: “=A1*(1+B1)^C1”
If you do it correctly, you should get $9,962.813 which is what your $5000 will become if invested at 9% compound interest rate for 8 years. Practice this by changing the variables to see what your money multiplies to using the power of compound interest rate.
Initial Principal and Monthly Contributions
The mathematics of money investments using compound interests can become even more complicated. Consider a situation where you want to work with compound interest with an original principal and monthly contributions to your investment every month after you receive your salary.
To calculate what your final principal amount will become when you invest an initial principal amount and monthly contributions of certain fixed amount at a certain compound interest rate, we will combine two compound interest formulas to work out the solution:
1. The formula for calculating compound interest rate - FP = OP( 1 + i )ۙª
2. The future value (FV) of an ordinary annuity formula – FV = MPA*(((1+i)ª -1)/i) where MPA is monthly payment amount.
The future value is a measure of the nominal future sum of money that your principal amount is worth at a specified future given a certain interest rate. And annuity, as defined in finance theory, refers to any recurring payments.
Therefore, to find what your final principal amount will become when you invest an initial principal amount and monthly contributions of certain fixed amount at a certain compound interest rate, you use the formula:
FPMP = OP( 1 + i )ª + MPA*(((1+i)ª -1)/i) where FPMP is the final principal with monthly payment.
Calculate Initial Principal and Monthly Contributions using MS Excel
You can find the final amount of your investment using MS excel. Note that since we have monthly contributions, we have to convert the interest into per month and number of years into months. The excel formula is as follows:
1. Open excel spread sheet and input the original principal in column A1 say “5000”
2. Input compound interest rate per month in column B1 say 9% as 0.09/12 which is equal to 0.0075
3. Input number of months in column C1 say 8 x 12 which is equal to 96
4. Input monthly contribution, say $100 in column D1
5. Get your final principal by inputting in column E1 the following: “=A1*( 1 +B1 )^C1 + D1*(((1+B1)^C1 -1)/B1)” =A1*(1+B1)^C1”
6. If all works out well you should get a figure of $24,230.22
The Power of Compound Interest Rate and a Monthly Contribution
You should get $24,230.22 which is what your $5000 and a $100 monthly contribution will become if invested at 9% compound interest rate for 8 years. Practice this by changing the variables to see how your money would multiply using the power of compound interest rate and a monthly contribution.
Investment for 30 Years
In the first case, we got $9,962.813. The second case was similar only that we added a monthly contribution of $100 and we got a whopping $24,230.22. Notice that difference which is coming as a result of your $100 monthly contribution. If you would continue this investment for 30 years you would get a final principal of $256,727.23
$256,727.23 is not a very large amount of money. But it can still be considered a good retirement investment for those in the lower bracket of income. 30 years is the average number of years many people work in regular employment. Saving $100/month in America is not a big deal – many people will comfortable do it again and again. A good son and a good daughter will easily be able to get the initial start-up principal of $5,000.00 from a good dad and a good mum if one can promise not to misuse the money but to use it on such an investment.
Of course, there are many money investment products in the market utilizing these principles where one can choose an appropriate product for retirement investment. It’s good one take action now when you are young and save an additional amount for your retirement investment – retirement comes very fast once you join employment. Look for such good online investment and once you are convinced the corporation running such investment is sound and stable, then get in and save for a rainy day.
That's all there is to it. Get yourself a book to improve on your knowledge on investments and the growth of your money. You can buy one or two inexpensive book on investing money at the trusted Amazon store.