[Introduction to Financial Management (5)] - The power of investment and the lethality of fees!

• If you invest $10,000 and get a 10% return, what will it be in forty years?

: Four hundred and fifty thousand.

• If you invest $10,000 and the financial management fee is 3% per year, the rate of return drops from 10% to 7%. What will it be after forty years?

: One hundred and forty-nine thousand. (Because 3% is paid to the financial management company, the final total amount is only 1/3)

• If $10,000 is invested and the rate of return is 20%, what will it be in forty years?

: 14.69 million. (You can become rich with your first month’s or first year’s salary at work, but truly rich people are so rare!!)

• If you invest $10,000 per year with a 20% return, what will be the total amount after forty years?

: 88.14 million. (What kind of number is this? It will continue to grow to 17.62 million every year. There will really be endless money to spend!)

The key point of investing: make the right investment, continue to invest, and don’t let bank fees, financial management fees, operating losses, and taxes eat up your rate of return. If the return rate is only 3% less, the wealth will be only 1/3.

Anyone who understands mathematics will know why a small drop in the return rate of the following formula eats up most of the wealth.

(10%)^2=(3%+7%)^2=(3%)^2+2(3%)(7%)+(7%)^2

(10%)^40=(3%)^40 + ............ + (7%)^40

It is less than 3% every year, not only less (3%)^40, but also less profit from all intermediate items.

Be careful! Be careful with investment fees!

Date of writing: June 05, 2016