Entries from September 2011 ↓

What is FV and How Does It Affect Me?

FV or the Future Value of money is an estimate of how much value the money you have today will have in the future. As every body knows, the prices of goods change always. Typically, your one thousand pesos can buy more goods today than it will buy in the future. Prices of goods increase from year to year and the government tracks this and calls it the inflation rate. Thus, if your money does not grow to keep up with inflation, it will continue to decrease in value for the long term.

Let’s get into the nitty-gritty details. With inflation rate at around 5% for example, your P100,000 will have a future value as follows:

Year Value
0 100,000.00
1 95,238.10
2 90,702.95
3 86,383.76
4 82,270.25
5 78,352.62
6 74,621.54
7 71,068.13
8 67,683.94
9 64,460.89
10 61,391.33
11 58,467.93
12 55,683.74
13 53,032.14
14 50,506.80
15 48,101.71
16 45,811.15
17 43,629.67
18 41,552.07
19 39,573.40
20 37,688.95

The formula is:

(Future Value) = (Present Value) / ((1 + (Interest Rate))^(Year))

So for example, the value of 100,000 after 20 years at 5% inflation rate would be:

FV = 100,000 / ((1 + .05)^20) = P37,688.95

So what does this tell us? It simply tells us that we need a financial plan that will protect our money from inflation. If you do not plan ahead, you’ll wind up losing your hard-earned money.

The Rule of 72

In finance, the Rule of 72 is a fast way of estimating when an investment will double. You simply divide 72 by the interest rate to get the number of compounding periods. For example, if you would like to know how long your P100,000 will become P200,000 at an annual interest rate of 6%, simply divide 72 by 6 which gets you 12 years. At an annual interest rate of 8%, divide 72 by 8 and your money will double in 9 years. At an annual interest rate of 9%, divide 72 by 9 and your money will double in 8 years.

So how is this information useful to you? Consider the interest rates offered by banks for savings accounts in the Philippines. BDO and BPI are both offering savings accounts with an interest rate of 0.5% per annum. Using the Rule of 72, 72 divided by 0.5 will give you 144 years! Even with a time deposit account, you could get a rate of 4% which means your money will double in 18 years. Based on these projections, don’t you think you would be better off placing your money somewhere else?

Ok, this rule is useful, but, why do we use 72? The value 72 is a convenient choice of numerator, since it can be divided by 1, 2, 3, 4, 6, 8, 9, and 12 and it provides a good approximation for annual compounding at rates from 6% to 10%. At higher interest rates, the approximation using the Rule of 72 is less accurate. Nonetheless, remembering this rule will help you easily estimate how soon your investment or savings will double given a particular interest rate.

What Self-Help Books Will Tell You

I’ve read numerous self-help and success books and I have noticed a common pattern for success. Here are the steps to success that I have seen from these self-help books:

  1. Envision what success means. The first step is to determine what success means to you. How will you know that you are successful if you don’t even know what success means? This is where a dream book comes in handy. A dream book can be a photo album with pictures of things that show you exactly what you mean by success. For example, your dream book could have a picture of a huge house overlooking a bright and sunny beach, or a picture of a happy family, or a picture of a toned body with six-pack abs.
  2. Set high goals. Goals are your milestones to success. Each goal should bring you closer to your definition of success.
  3. Believe that you can achieve your goal. Nothing will happen if you do not believe in your self.
  4. Plan for success. Your goals will not be achieved without some planning on your part. Think it through and find the best way to get to your goal.
  5. Be disciplined. Do the right things at the right time. Each time you do a thing that is not in your plan, you are undermining your success. A helpful tip here is to start each day by writing down the six most important things to do for the day. Prioritize the list, and do each one according to priority. Proceed to the next task only if you complete the preceding task. If you do not complete all six things, carry the unfinished tasks over to the next day and assign them the highest priority.
  6. Never give up. Keep at it even when obstacles come your way, and believe me they will.
  7. Learn something new every day. When you improve yourself, you discover faster ways of doing things, or better tools to use in your daily life. When you make it a point to do this every day, learning will become a habit for you.

That’s it folks. I hope this helps you take your first step towards success. Go go go!

Why Am I Writing This Blog?

Simply put, I am writing this blog because I want to share my thoughts on matters of interest to me to whoever wants to listen. The topics I want to explore in this blog include the following:

  • Personal Finance
  • Stock Trading
  • Forex Trading
  • Real Estate
  • Software Development
  • Internet Marketing
  • Solutions For A Better Philippines
  • Traveling The World
  • My Favorite Books

In other words, I’ll be talking about everything under the sun that I find worth discussing. I hope you find this blog interesting.