Tuesday, February 12, 2008

Too Long.....................???

First step to be taken is to determine the monthly allocation for building the first million worth of assets. I think generally RM500 per month is quite a comfortable amount that can be set aside by most who are employed. Hence I would choose to illustrate below how RM500 saved every month will grow under different rates of return within 30 years:

(a) Without any return on investment at all - Merely RM180k (or the principal amount)
(b) At 5% annual compounded rate of return - RM410k (2.3 times the principal amount)
(c) At 8% annual compounded rate of return - RM709k (3.9 times the principal amount)
(d) At 15% annual compounded rate of return - RM2.8 million (15.7 times principal amount)
(e) At 25% annual compounded rate of return - RM21.9 million (121.7 times principal amount)

The above numbers tell me that if I can grow my assets at 15% per annum on compounded basis, I will be able to reach RM1 million before 30 years. To be frank, I was totally demotivated when the numbers say that I can only probably achieve my aim of having RM1 million worth of assets between 20 to 30 years from now on if I start to save RM500. That is also provided that I can continue to achieve 15% annual compounded rate of return. It's too long a time horizon to look at.

Most of the people I talked to have the same thinking that saving RM500 per month (in which is quite a huge amount for those who are employed and not earning huge salaries) and only able to reach RM1 million dream in 20 - 30 years is a long time horizon. However, the funny thing is they know how difficult it is to achieve but they decide not to even do it!

Bottom line is let's not procrastinate and think how much we can allocate every month for long term investment purpose. Generally, financial consultants/planners advise to allocate from 15% up to 20% of gross income for investment purpose. I leave that to you on how much you want to allocate. I am gonna start off with RM500.

If you are not too well versed with calculation of returns based on amount of allocation other than RM500, let me know as I can assist in providing you the numbers.

(p/s: I have excluded other form of forced savings such as contributions to Central Provident Funds in Singapore or Employees Provident Funds in Malaysia in the above discussion. Of course these contributions will also help to achieve RM1 million sooner than the above timeline. Reason for exclusion is that you can't really do much with the rate of return of the funds. I prefer to concentrate on the monthly allocation and how you can maximise it's growth rate by investing in accordance to fundamental investment principles.)

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