In Futurama (a cartoon series I would highly recommend if you haven’t seen it yet), pizza delivery boy Fry accidentally falls into a cryogenic freezer and wakes up 1,000 years in the future. Fry eventually checks his old bank account – which prior to his frozen time journey only had 93 cents. After 1000 years, he learns that the balance has compounded from less than a buck to the staggering sum of $4.3 billion. I reverse-engineered this calculation and found out that this figure is indeed legit, assuming that his bank account has an annual rate of 2.25%.
That example may be too long (1000 years is 10 centuries!) unless you’re planning to send an inheritance to the 10th generation after you. Let’s use realistic figures instead: say you invested Php50,000 now with annual returns of 8%. 30 years from now that would be Php503,000, a decent 10x your original money. As an investor, time and exponential growth are your key laborers.
Calculation made simple: to compute for the future value of compounded returns, multiply the starting amount by 100% + return %. Do this as many times as the number of years. This computation is one of the foundations for financial planning. For the above examples, you can enter this in MS Excel.
=0.93*(100%+2.25%)^1000
=50000*(100%+8%)^30
Caveat: An 8% annual return is mostly possible if investing using stocks. We may be falsely expecting that our money continuously grows at a constant rate but in reality, it would have rampant swings both on the upside and downside. If this is new to you, don’t worry, we’ll have a future dedicated article about this.
The rising cost of living that we usually ignore
Nowadays, you’ll be very lucky if you don’t hear a lot of people sharing their disappointments. With all due respect to the older generation – I’m sure they’ve had more than their share of challenges in life, I’m pretty sure you’re familiar with this saying: back in my day, _______ (insert jeepney/bus fares, eggs, milk, meat, etc) would only cost you ___ Pesos. We don’t even have to go very far for this example to make sense: the price of beef nowadays would be at around Php260 per kilo while 5 years ago it was only at Php200 per kilo.
Economists call these rising prices as inflation. It feels sort of like we’re in the Red Queen’s Race from Alice in Wonderland, where you have to keep running and running just to keep yourself in the same place. Our money is the representation of what we can afford – the more prices of items increase, the lower its value becomes. From a practical standpoint, it means there is even a cost to not investing!
The extraordinary mindset of an investor
Oftentimes, when we take on a challenge beyond our comfort zones, our expectation focuses the physical manifestation of success – an award, a promotion, an Instagrammable moment. What surprises us, as we emerge on the other side, there is a substantial change within us. A change in our mindset – we become more confident, daring and bold.
With investing, the benefits are not limited to monetary ones. By getting to know where to put your money so it can grow, you also get to know yourself more. Experienced investors are able to add the following traits into their mental tool kits: analytical decision making, risk management, and keeping calm under pressure.
Looking at potential gains and losses while weighing the trade-offs between alternatives is mandatory for business decisions, while keeping yourself sane and collected even if there’s an ongoing online meeting as your child cries and throws his food around is an exercise in self-control and discipline. These mindsets can be learned or sharpened via investing. They are valuable skills, and transcend any field or endeavor.
IMPORTANT NOTICE: This document is for general information purposes only. It is not an investment advice and does not constitute any offer, or a solicitation to buy or sell any investment product. Further, any opinion stated by the author does not necessarily reflect the position of Allianz PNB Life.
