FINANCIAL FREEDOM

Periodic or Only Once

When you make an investment, then there are two choices, can make a periodic basis, or only once. Periodic investments, you could invest once a year, six months, or even once a month. Some people there who invests every one or two weeks. But the important thing here is that what is meant by periodic investing on a regular basis.

Typically, a periodic investing is the most powerful ways to pursue a major target of future funding. You do not need to have a large amount of funds at this time, but small enough to set aside part of your income to invest in an investment product. Over time, you will have a balance of investment was so great, because you also earn interest.

Periodically invest the same as a builder who was making the wall. What he did was take a brick, smeared with cement, and paste. Take longer a brick, giving the cement, and placed it on the left or right side of this brick. And so on until he could finish one layer. After that, he will continue with the second layer. The second layer is complete, followed by the third layer. And so on.

Over time, you’ll see a wall. Just like that picture when you invest periodically. Only difference, by investing, you also earn interest. While the builder was, do not get the ‘flower’. All he did was like a piggy bank to save it on a regular basis. But the principle is the same: a little, will be a hill.

You also can invest only once (lump sum). That means, you can simply put the money just once in an investment product, such as deposits, and then you say let stand for ten years. Every year, you will earn interest, which you can add to your principal. Then, deposited again, so that the flowers larger and larger. But, as long as you had never touched it, until over ten years. After ten years, you will have a number of very large funds.

flowers bloom

Someone once said that the concept of interest rates is the biggest discovery in this century. This is not excessive. For example if you enter Rp 1,000,000 at this time to the deposits that provide 12 percent per year (with an annual interest rate system), at the end of the first year that your balance will be USD 1,120,000.

At the end of the tenth year, your balance will be USD 3,105,848. At the end of the 20th, your balance will be USD 9,646,293. Then at the end of the year to 100, your balance will be USD 289,002,190.

What caused the balance of your investment could be so big? The longer your money spinning in the interest rate system, the greater the interest you earn. If using a snowball sample was, the higher the peak of the mountain snow, the greater the snowball that later when he reached the bottom of the mountain. This is because the higher the mountain snow, the more snow that the velocity of the ball before he reached the bottom of the mountain. That is, the longer your investment period, the greater the balance of your investment later.

Most of the investment using the interest rate calculation system. For example, if you buy a house that is currently only worth USD 100 million, then at the end of the year, let’s say the house has become worth USD 120 million (a 20 percent value addition). At the end of the second year, the value of your home may already be USD 120 million multiplied by 20 percent. And so on, even though up to 100 years. This concept is the same for almost all investment products.

What does this all with you? If you’re saving for a particular purpose later on, so the earlier you start, it is also the longer your investment period, so it will be the better for you.

LITTLE BIG DIFFERENCE

It is also necessary to realize the difference interest rates (inter-bank) that small could even differ greatly affect your investment balance. For example, let’s say at this moment you have a USD 2 million. You then open the 12-month deposits in two banks, Bank A and Bank B. Each Rp 1 million.

Let’s just say, interest rates on Bank A is 9 percent per year, whereas in Bank B is 10 percent per year (1 percent difference). This means that, at the end of the first year, Bank A would give flowers USD 100 thousand, and Bank B is only USD 90 thousand. The difference is USD 10 thousand. Small? Indeed.

But when viewed in the long run, differences in both investment balances of deposits would be very large. The longer the time, the greater the difference. At the end of the year to 20, for example, your balance is USD Bank A and Bank B 5,604,411 USD 6,727,500. Means there is a difference Rp 1,123,089.

At the end of the year-50, the balance in the Bank A is Rp 74,357,520, while the Bank B reaches USD 117,390,853. So the difference in both the bank balance is USD 43,033,333.

Combine Time and Frequency

The examples above assume you make an investment only once (lump sum), where you put the money just once, and silenced for years, until 50 or 100 years.

But what if you do not invest just once, but the routine every year? Let’s say you’re beginning of each year to deposit USD 1 million. After 50 years, the amount you sent to $ 50 million. But since you put it in investment interest rates, the balance of your investment after 50 years to $ 2,688,020,438!

In fact, the total amount you sent for 50 years was only Rp 50 million. Try to compare with once investment (USD 1 million), and the results you get after 50 years is USD 289 million.

Therefore, a combination of the frequency of regular investment in long term investment you have, will result in investment balance really great magnitude. So, how? Still want to postpone investing?

Flowering Monthly Interest

What you see above this is the concept of interest rates, the interest paid every year (yearly compound interest). However, there is also the interest rates paid interest each month (monthly compound interest).

For example, we will use the same numbers with the example above, where you put money Rp 1 million. Only difference, you do not open it in the form of deposit accounts, but the savings.

For simplicity, let’s say it also provides savings interest rate of 12 percent per year, payable monthly. This means that, at each end of the month, the interest you earn is not 12 percent, but 12 percent divided by 12, or 1 percent. This is because there are 12 months a year.

Thus, the calculation of your investment balance at the end of the first month are:
Rp 1.000.000 + (Rp 1,000,000 x 1 per cent) = Rp 1.000.000 + Rp 10,000 = Rp 1,010,000.

At the end of the second month, your balance becomes:
100 USD $ 1,010,000 + (USD 1,010,000 x 1 per cent) = USD $ 1,010,000 + USD 10,100 = USD 1,020,100

And so on every month until the end of the month your balance becomes 12:
USD $ 1,115,668 + (USD 1,115,668 x 1 per cent) = USD $ 1,115,668 + Rp 11,157 = Rp 1,126,825.

If this continues until the end of the 10 (or months to 120), your investment balance to $ 3,300,387. More than if you use the annual interest rate.

Flowering Daily Interest

What about the interest rate system that paid a daily basis (daily compound interest)? Many banks offer advertising savings products that provide a daily interest like this. The concept is similar to the monthly interest rate. The difference is, the interest is not divided by 12, but 365 (according to the number of days per year), until the amount is 0:03 per cent per day.

Now we will calculate how many you get. Once again, we use the example as above.

Your balance at the end of the first day are:
Rp 1.000.000 + (Rp 1,000,000 x 0.03 percent) = Rp 1.000.000 + USD 329 = USD 1,000,329.

And so on until after a year (or the end of the day to 365) your balance becomes:
USD $ 1,127,104 + (USD 1,127,104 x 0.03 percent) = USD $ 1,127,104 + USD 371 = USD 1,127,475.

If continued until 10 years, then at the end of the day into 3650, your balance will be
Rp 3.319.462. More than if you use the bank interest rate monthly.

You have seen that the differences in the use of interest can affect your investment balance at the end of the year, although all are equally promising 12 percent interest per year. The reason is simple: because the amount of interest you receive is different.

Different flowers that you can then bring the term “effective rate” (effective rate). The ratio of the amount of interest you earn at the end of the year, with the amount of money you entered. How to calculate the effective interest rate is very simple: the interest you receive at the end of the year divided by the nominal value of your money at the beginning of the year.

So, if there is an investment product that promised 12 percent interest rate per year, then it might be the effective rate is not 12 percent. What you receive at the end of the year may be more than 12 percent. By knowing the effective interest rate, then the difference is you get to be really visible.

In addition, the effective interest rate also allows you to speed up your calculations. That is, if we use our earlier example of Rp 1,000,000 as initial fund your investment, then for the next, we can just change it to $ 5,000,000.

You also do not need anymore calculating how much interest you get when using the system daily interest rates, for example. You do not need to calculate interest over and over again until 365 times. Simply multiply by 12.74 percent, or multiply the USD 5 million was with 12.74 percent.

Simple Interest

If the bank uses a system of simple interest, then at the end of the first year, you’ll get an interest rate:
USD 1 million x 12 percent = USD 120,000.

At the end of the second year, you will get an interest rate:
USD 1 million x 12 percent = USD 120,000.

At the end of the third year, you will get an interest rate
USD 1 million x 12 = USD 120,000.

And so on, until after ten years, you will get a total interest rate: Rp 120.000 x 10 = Rp 1.200.000.

Thus the balance of your investment will be: Rp 1,000,000 (initial funding) + Rp 1.200.000 (total interest) = Rp 2.200.000.

Simple, right? Hence, the interest calculation system is called simple interest.

A Flowers bloom

The concept of blooming flowers is a concept in which the interest you earn will be added to your principal, so that the interest earned in the next year will be even greater. Just like a snowball rolling from the top of the hill of snow. The more down bigger.

Now we’re back to use the example of money USD $ 1 million earlier. When you open a deposit worth Rp 1 million with a 12 percent interest per year, the balance of your investment at each end of the year are as follows:

At the end of the first year, your balance is:
1.000.000 + (Rp 1,000,000 x 12 percent) = Rp 1.000.000 + Rp 120.000 = Rp 1,120,000

At the end of the second year, your balance becomes:
USD $ 1,120,000 + (USD 1,120,000 x 12 percent) = USD $ 1,120,000 + Rp 134,400 = Rp 1,254,400.

USD $ 1,254,400 + (USD 1,254,400 x 12 percent) = USD $ 1,254,400 + Rp 150,528 = Rp 1,404,928.

So on every year, until finally at the end of the 10 balance balance your investment will be USD 3,105,848. Far more than if you use this simple interest method (which only Rp 2.200.000).