$5K is all it takes to be a Millionaire

let's ponder over this for a moment...

this is the scenario...

if you and I had just an extra $5K for investments in 2009 and if we aim at achieving a certain fixed annualized % return on this additional investment capital for the next 10 years...

let's look at how the target % return on capital will make a huge difference in the end.... here's the math...

$5K, 30% ROC, 10 years
end of 1st year (2009), $5K becomes 5k x 1.3 (60%) = $6.5k
end of 2nd year (2010), $8K becomes 8K x 1.3 (or 5K x 1.3 x 1.3) = $8.45K
...and so on so on...until we arrive at
end of 10th year (2018), $5K x 1.3 (power of 10) = ~$69K in your pocket book

$5K, 33% ROC, 10 years
end of 10 years, $5K becomes 5K x 1.33 (power of 10) = ~S$86.5K

Note that by raising the ROC from 30% to 33% (ie 10% increase), the actual dollar return is drastically increased. Restated, by increasing the target Rate of Return on Capital, we will exponentially increase the actual returns. The next example should drive home this point

$5K, 60% ROC, 10 years
end of 10 years, that original $5K capital, will become (5K x 1.6 ) ~$550K

and if you press on for another 3 more years.....(don't blink now)
end of 13 years = $5K x 1.6 (power of 13) = ~$2.25 million

What important lesson can we draw from these examples above? We learn that choosing a higher % annualized returns AND the longer the investment time frame, yield much much more actual dollars...heck, then why not aim at annualized 80% return on capital over 13 years($5K, 13 years at 80% returns = $10.5 million)? i guess, it is all about our own investment psychology and abilities.

Another way of saying this.....the key variables involved above are :

1) % Rate of Return
2) Length of investment timeframe

Is the amount of initial capital outlay as important? No, it is not....surprised? Afterall, one would logically imagine, if my original amount was twice as large; ie $10K, that would make also exponentially increase my eventual actual returns, just as items 1) and 2) above would, right? Wrong !!! Let me show you...


$10K, 60% ROC, 10 years
end of 13th year, $10K x 1.6 (power of 10) = ~$4.5million in your pocket book

$4.5MM (using 10K outlay) vs $2.25MM (using 5K outlay), represents 2 folds. But that's it, just 2 folds. If the original outlay was $15K, the returns would be 3 folds, and so on... it's just pure mathematics...no magic here.


The Conclusion:

It is not the "size" of the initial capital outlay that affects as much the eventual size of leprechaun's pot of gold.... What counts, are just 2 incredibly simple variables; target % rate of return on capital and length of investment period...

and oh...HOW do we do this? that's some homework for the remaining days of 2008 (*wink)