The Money Tree and Compounding Values… Norair Yeretsian

Growing your money is easy with the help of a financial calculator,
I recommend the HP10BII or the HP17B+ . These are great calculators,
my preference is the HP 17BII+ it works wonderfully with cash flows
and ‘what if ‘ scenarios.

Here are some classical examples of  compounding values / payments
and a wonderful illustration of time value of money . Essentially
how time effects money over the time period you establish (set) .

Example  1:

One dollar invested in an opportunity that yields a doubling each
period for twenty periods, what would the future value be. With
no other payments /investments made.

Step 1 : make sure the calculator is set to  1   P/ YR , and clear all .

keystrokes would be ;  1 [shift] p/yr  [shift] [c]

Step 2 : into your TVM menu insert the following relevant numbers

20 [ N]

100 [ I/YR]

1.00 [+/-]

0 [PMY]

solve for future value by pressing [ FV]

the display should read : 1,048,576 .

Therefore according to the math , if you invested one dollar into an investment
opportunity that afford you a doubling ( 100%) each period for twenty period, you
would have $ 1,048,576 . This could be over twenty years, months,hours etc…
The calculator work on an annual basis or bias.

This is how easy it is. Compounding is the process of starting in the present
and building / growing at a certain rate (interest rate/ growth rate /compound rate)
into the future. Discounting is the reverse process, where we start with a large
amount of cash flow and with an appropriate discount rate work back to the
present – hence present value ) . Compounding we start with a small value
and grow it into the future ( a larger value ).

Example 2 :

Look what happens when we go from $ 1 to one penny $ 0.01 as our investment
in PV and we simply change the time frame from 20 periods to say 30 periods in [N].
Everything else stays the same as above;

30 [N]

100 [I/YR]

0.01 [+/-] [PV]

0 [PMT]

solve for future value :  pressing  [FV]

result on the display says :  $ 10,737,418.24

Wow ! , take the penny . Yes, but what is the real story here ?

It’s that time is working in your favor to give you this incredible number.

Starting with 100 times less money you could have ten times more money
( if that is the object of the game ) then a wealth competitor.
If you start early enough to let the Magic of compounding work in your favor.
Talk about the Laws of attraction, I’m attracted .

A real life example , I have used is the coke ‘s IPO ( initial public offering )

back in 1919 at $ 40 a share, if held for a 74 year period .
Over which coke’s stock averaged annual  growth rate of approximately 15.8 % was achieved .
How much would you have by 1993 ?  Back to the calculator ; TVM menu .

74 [N]

15.8  [I/YR]

40 [+/-]

0 [PMT]

solve for future value :  [FV] =  2,072,494.50

Wow ! Now this number does include all the dividends reinvested and all the stock splits .
Simple – buy and hold  ( for a very long time ).
But no market timing, no watching the stock ticker every 5 minutes, etc…

Real Estate is a great long term investment and in future blogs, we will try
to include some examples of successful buy and hold investment strategies
and the yields received / earned over the periods held.

If you have any stories you wish to share with us , we would love to hear them
and in turn share them with our readers.

Let’s continue the conversation on Twitter : EnvoyCapRealty or below

nyeretsian@yahoo.com May 23, 2010