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Monday, December 10, 2007

The World's Greatest Formula

Another 'Get Rich Quickly' scheme?? No, this one works; check it out yourself!!

The formula: FV = PV * (1+r) ^ n

Where:
FV = future value
PV = present value
r = rate of return
n = time (or number of years)

Compounding 101:
Now, some astute finance brains will know that equation not as some mystical secret but as the "future value of money" (FVM) equation taught in college.

The FVM formula simply states that your future wealth (FV) is a function of three variables: the amount of money invested today (PV), the rate of return generated (r), and the length of time in which that money is put to work (n).

So maximizing future riches requires three steps.

Step 1: Increase 'PV'
It takes money to make money. But by actively and consistently slivering off a portion of your earnings every month to save and invest, you'll have more and more of that money working for you.

All things equal, the greater amount you invest today (PV), the greater wealth you'll build for tomorrow (FV).

Step 2: Increase 'r'
Next, you'll need a way to grow that capital. Historically, the stock market has been the most effective wealth-building vehicle of all. Plowing your money into a low-cost index fund wouldn't be a bad idea. This is where the importance of right investment principles comes into play.

Step 3: Increase 'n'
The last ingredient in our super-simple wealth-building recipe: maximum time in the market.
Look back at the equation. You'll see that n is an exponential function -- meaning that for every year you're not invested, you give up the awesome (almost magical) benefits of compounding.
All things equal, the longer you're invested (n), the greater wealth you'll build for tomorrow (FV).

Final word:
So don't waste another "n." Start plugging whopping returns into your own real-life wealth equation today.

Source & Complete Article: http://www.fool.com/investing/small-cap/2007/12/05/the-worlds-greatest-get-rich-formula.aspx

1 comments:

Sevugan said...

Small mistake in the formula. You have left out the financier factor. Now, show me the money, I will test if the formula works. :-)