by Susantha Nanayakkara

Created on: October 11, 2009   Last Updated: October 12, 2009

Jone ,at the age of 65 yrs,was thinking back about his financial decisions.He got married to Sonia 40 years ago.At the marriage Sonia's father gifted him a government bond certificate worth US$ 50,000.Sonia's father told him that he could have accumulate all that money as he deposited US$ 5000 at Sonia's birthday and reinvest it in bonds over last 25 years. According to Jone's father- in- law, he received an interest at an average of 10% per annum and all of it reinvested every year.

Jone ,at his young age, had a good car worth US$ 5000. His friends and some relatives persuade him to go for a US$ 20000 vehicle. Since it is a nice idea, he sold his car to $5000 and remove $ 15,000 from farther- in- law's deposit and bought a new vehicle at $20000.Then he kept the remaining money in two government bonds.One worth US$ 15,000 and other worth US$ 20000. As his wife insisted he never took out money from US$ 20000 deposit and reinvested annually at the average of 5% interest.But the other deposit's interest was withdrawn but they were careful enough to keep the capital in the deposit.Jone's employment was more than enough to cover up their living expenses.

But Jone is at his retirement with no money saved or invested from his income from his job. In fact, he has a credit card balance of around US$ 6000 to pay.Fortunately, he listen to his wife and kept reinvesting money in bonds which accumulated to the value of US$141,000 and did not withdraw other account's $ 15000 capital. Now, he is not getting adequate money from his retirement allowance and he compelled to take money from both deposits.Again,his wife persuaded him to keep money invested in shares for long term and take only dividends which is around 3% dividend yield per year at the beginning.

How is this $ 5000 reinvestment grew into $ 50000 over 25 years.It is the power of patience and commitment plus the magic power of compounding.The formula is as follows.

FV=PV(1+r)n

'FV' is future value

'PV' is present value

'r' is rate of return for a period (per one year or a month)

'n' is number of times (years)

If we took Jone's $ 20000 reinvestment over 40 years at an average ROR (interest) of 5% per year,We would get 'FV' as $140800.

FV=20000(1+0.05)40

=20000 into 7.04

=$140800

Unless he withdrew money to buy the fancy car, his capital(nest egg) at the retirement would be US$ 246400. Isn't it adequate to support along with his retirement income from his job as he decided to invest in shares for long term and take dividends?

He could have approach in a contrary way against his relatives and friends.In fact, His fancy car was already depreciated in value and discarded long ago.The life span of previous car was also the same but at a lower cost.

A article appeared on compound interest ,written by Robert MacKenzie, in 'Canadian money saver in Feb.2009 issue' further explained how to improve the return by using the compound interest formula.

One important thing is keeping the capital remain to multiply.In the book 'The richest man in Babylon' written by George S Clason simulate that taking capital away is like destroying worker's children who will otherwise work hard for you ,in future, to earn money.

Next, valuable habit is keep investing as long term as possible. Sonia's farther committed to persist while reinvesting over 25 years.Even, Sonia could persist with her pressure to keep Jone's patience to reinvest her farther's money for 40 years.

Finally,select an investment ,using your and your mentors wisdom and improve it as you proceed, to gain higher rate of return. That is what, Jone hopes to do during his retirement

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