The information in this article is general only, past investment performance does not guarantee future investment performance, before you make any financial decision you should seek the advice of a qualified professional
Today I’m going to talk about a concept that not many people know about
This thing I’m about to talk about will explain to you that when you invest your money over time you actually end up with more than you thought you would!
How is that possible? You ask.
I will explain now, I call this the velocity of money.
Ok, so when people do a calculation on what their investments could turn into over time when they use compound interest calculators what they don’t realise is that your income at your job or business goes up over time.
YOUR INCOME GOES UP OVER TIME which is inflation really..
So let’s say your income goes up over time at an average rate of inflation of say 3% a year.
Well then the amount you invest goes up each year with inflation!
You might of calculated that your investment of say $100 a month would turn into x amount over 10, 20 years but with your income going up you would have invested a lot more and ended up with a lot more!
I will provide an example now how simply getting pay increases over time with inflation causes you to END UP WITH AN EXTRA 10% at the end of the 10 year investment term.
Ok, so in this example I will explain how investing $100 a month for 10 years at 8% (3% inflation + 5% dividends reinvested which is basically what the stock market returns) in two different situations
The first situation is how people normally calculate it, with no increase to deposit amount and the second situation is with the increases in pay and therefore deposit amount.
Ok, here’s how the first situation would look.
Investing $100 a month for 10 years at 8%
After 10 years you end up with $17,383 or $12,935 if adjusted for inflation (3% a year)
Now the second example, the deposit amount each year increases with pay rises from inflation
Year 1. $100 per month = $1,200
Year 2. $103 per month = $2,532
Year 3. $106 per month = $4,006
Year 4. $109 per month = $5,634
Year 5. $112 per month = $7,428
Year 6. $115 per month = $9,402
Year 7. $118 per month = $11,570
Year 8. $121 per month = $13,947
Year 9. $124 per month = $16,550
Year 10. $127 per month = $19,398
SEE THE DIFFERENCE! $19,398 versus $17,383!
That’s a difference of $2,015 which is a 10.39% increase!
See how the velocity of money works?
Imagine if you took pay rises into your own hands and seeked a higher paying job or did well in your own business, you could turn that 10% into 30%, 50%, 100% or more!
See how it works guys? Keep it in mind next time you calculate your investment goals.