The King, The Sage, and a Game of Chess
There was a once an king in India who loved chess and it was a mark of honour to be invited to play against him - for stakes nominated by the visitor. One day, he invited a visiting sage to play with him and asked what the man would like if he were to win.
The sage modestly requested that if he won the king would place one grain of rice on the first square and double it on every subsequent one.
The king lost the game and ordered a bag of rice to brought to the room in which they were playing. He started placing rice grains as agreed: one grain on the first square, two grains on the second, and so on.
He watched with growing consternation as he realised his inability to fulfil his promise:
• By the twentieth square the total would be 1 million grains of rice
• By the fortieth square the total would be 1 billion grains of rice; and
• By the sixty-fourth square the total would be over 18 quintillion grains of rice (approximately 210 billion tons)
At that point the sage told the king that instead of paying him the debt immediately he could do so over time.
The Rule of 72 and the Rule of 15
Most reputable investments don’t double every year like the rice in the chess game (wonderful as that would be), but the point is that using the power of compound interest over time, even a relatively small investment can become a power-house when it is nurtured and added to consistently over your working life.
The Rule of 72 and the Rule of 15 are two commonly used guides to help you calculate your return on any investment, and either of them suggests a powerful opportunity for asset growth.
The Rule of 72 is a handy formula to calculate how long your investment will take to double:
72
Years to Double = ——————
Interest Rate
So, if your interest rate on an investment is 8%, your investment will double in 9 years.
The Rule of 15 works similarly, but in this case predicates that given an interest rate of 15%, your investment will double every 5 years.
Salt Financial Group: Key to Compounding
Here at Salt we’re focused on our clients long-term, medium-term and short-term financial future so the power of compound interest is a very powerful tool.
In the short-term you want enough money to enjoy life and create memories for yourself and your family, at the same time, you want to be saving for unexpected financial strains, and also investing wisely… Salting the money away and letting it grow so that you can use it later and leave it to those you care about.
We don’t tell our clients how to spend their money, but we do advise them how to balance their spending, saving and investing based on individual assets, income, and needs and taking advantage of the power of compound interest is a central part of our recommended strategy. Compound interest takes time to show it’s power - it’s not for the impatient, but then most wealthy people (not merely those with high incomes) understand the importance of patience and discipline because that’s how they became wealthy in the first place, or grew their inherited wealth.
Watching the Interest Compound at Salt
Most investments are not quite as straight-forward as the rice grains in the story above. Returns fluctuate and your needs change. In a global market, it’s important to balance and oversee your investment portfolio and occasionally move your investments around strategically to maintain that compounding effect.
Ideally, by the time you retire your investment portfolio has compounded to such a degree that your interest is more than sufficient for your living expenses, and you may even be able to keep re-investing it.
The keys to maximising your return are:
1. Start as early as possible in your life and commit to leaving that money untouched;
2. Plan to keep adding funds to your investment portfolio regularly;
3. Strategically monitor your investment in the light of trends and regulations.
There’s No Substitute for Custom Financial Advice
If you’d like some advice on your investment portfolio or on balancing your short-, medium- and long-term financial needs, contact Salt to schedule an appointment with one of our experienced advisors.
Book an appointment HERE.
OR
Call us on 03 9088 4777