The Power of A Dollar

Russ — Sun, 04 Jul 2010 22:30:35 +0000

This is something Warren Buffet understood from a very young age and has kept with him ever since.

That is, the power of every dollar you have and how much it is truly worth to you. And, as a consequence, why you should spend as little of it as possible now, as it will be worth so much more in the future.

For clarity sake, let’s start with an example.

How Much Is A Dollar Worth Today?
Not much. After all, you cannot buy much with a dollar these days. Not even a chocolate bar or a can of Coke. So, why should you care that much about one measly dollar?

Now, what if I told you that if you gave me that dollar then I would, in 20 years, give you back much much more than what it is worth today. Some of you would be thinking that given inflation, it would be worth even less than it is today. But you would be wrong.

What A Dollar Will Be Worth Later
In 20 years that one dollar, if you are smart, would be worth a lot more than it is today. Even in a simple bank account, it would be worth $2.40 (assuming a 5% pa interest rate). But that is being overly conservative.

If you invested that one dollar, along with other one dollars you saved or collected, you could make a lot more than that over 20 years. If you look at the long-term growth of the share market in Australia over the last 100 years, real returns after inflation for Australian shares listed on the stock exchange have averaged around 7.5% per year.

So, that one dollar, invested in the share market over those 20 years, would now be worth $4.30.

So, why would you spend that one dollar now when it could be worth $4.30 in the future? If you look at money in this way, you will realise the power of saving it now for future benefit.

Using This Knowledge
A more practical way of looking at it is the future cost of things that you buy. So, that can of Coke that costs you $2 now, is actually costing you $8.60 in future dollars (or F$). Ouch! That’s an expensive can of Coke!

How about that dress you spotted in a sale that you don’t really need but decided to buy anyway? What was it on sale for? That’s right, it was half price, down from $99.99 to $49.95. A real bargain! Not quite.

Not only would you not be saving any money, you would be spending $49.95 you weren’t expecting to when you left the house that morning, or as you should be looking at it, F$215.05 (a 430% increase over current value). Not really a bargain after all, is it?

Your Future Self
So if your future self could come back through time, 20 years from the future, and tell you not to spend that $49.95 on a dress that she cannot even remember owning, because that money would be worth so much more to her then, what would you tell her?

What would you tell her? And does this mean much to you right now?

If you want a quick way of calculating this when out and about or when you are tempted to spend money on something frivolous, then simple multiply the cost of what you want to purchase by 4.5 or, if you are not that good at maths, an even 5. This will give you a rough idea about how much that money is really worth to you in $F.

Image Credit: Claire L. Evans

Author Info
This article was written by Russ – the founder of MonoMoney.com and total geek. Feel free to contact him via this website and let him know how well he is doing. Or just leave a comment below.

Rule of 72 – Double Your Money

Russ — Sat, 03 Jul 2010 22:30:56 +0000

This rule is a handy one to know when investing.

While a lot of online calculators already have this inputted into their calculations and it would be an easy matter for you to use them instead, it is handy to know how to do it yourself, and it is pretty easy anyway.

What is the Rule of 72?
It’s simply a rule for calculating when an investment doubles. Assuming you add nothing more to an initial investment, this rule will tell you, based on the interest rate used, when that investment will double in value, in years.

Please note that the rule assumes that you are using compounding interest and not simple interest, but I would say every savings account and investments uses compounding interest these days so it is a safe bet that yours does too.

The Formula
Calculating this rule is pretty easy, you simply divide 72 by the interest rate (given as a percentage).

To give a simple example, say you had $100 in an online bank account at 4.5% (assuming the interest rate stayed the same over that time – I said it was a simple example) it would take approximately 16 years for that money to become $200.

72 Isn’t Accurate
Now, I say approximately because the Rule of 72 isn’t all that accurate. It’s close but not exact. The Rule of 69 is a lot more accurate, but 72 divides into a lot more numbers cleanly than does 69, which is why it is used; and for small or approximate calculations it works just fine. So feel free to substitute 69 for 72 when doing this calculation.

If you want to be even more exact, use the number 69.3 – as that is even more accurate than 69.

To use our example above with the more accurate number of 69.3, we get a more accurate answer of 15.4 years, or 15 years and 146 days.

As you can probably tell, for this calculation it doesn’t really matter what the amount of money invested is. It will work with any amount at all.

Image Credit: stuartpilbrow

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The Power of A Dollar

Rule of 72 – Double Your Money