time value

for each fiscal or want to learn to manage their money for people who are interested in, they first need the concept of exposure is the time value of money (TIME VALUE) principle, the meaning of this principle is to tell the people a dollar today does not mean that a dollar tomorrow, a lot of time, tomorrow’s money is worth less money today, because the currency will depreciate in value. According to rough statistics, and today may only be the equivalent of 100 yuan reform and opening up 25 or so, if you count the opportunity cost of funds and their psychological satisfaction to the people, the depreciation of these years is terrible. We value the cash flows (PV) and future value (FV) relationship between K and the number of installments with interest rate t to be expressed as:

FV=PV × (1 + K) × t

For example, today’s 100 (FV), the inflation rate of 4% (K) case, the equivalent of 10 years (t) after the number of money? The answer was 148 yuan, that 10 years after the equivalent of today only 148 yuan to 100 yuan.

compounding

second important concept is the principle of compounding, that is, people often talk about Lvda Gun, compound interest. But do not underestimate its role, its power, but very striking. Assume you have 10,000 yuan, by investing in financial management, earned 15% a year, then for 20 years, the last with interest became 163,665.37 yuan, and surely you see the figures will be very surprised, right? But for 30 years, the total amount of 662,117.72 yuan becomes that if 40 consecutive years, the total amount is how much? The answer will make you stunned: 2,678,635.46, ie, a 25-year-old office worker, the investment of 10,000 yuan, earning 15% per year, to 65 years of age, can become a millionaire. You might say this every year can not earn 15% ah! We are here to say that the rate of return is an average, if you have enough patience with a reasonable investment, this rate of return is not difficult to do.

for the calculation of compound interest, I am now to introduce a simple general algorithm: “Rule 72 of compound interest.” It is like this, with 72% removal at an annual rate of return, get the number, that is, doubling the total number of years required. With the above example to illustrate, 72% divided by 15%, is 4.8 years. That is in front of 10,000 yuan, 20,000 in 5 years, it becomes a.

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