One of the important steps towards sorting out your finances is to make sure that you take full advantage of the miracle of compound returns, but simply understanding how it works is not enough. You must live it.
Albert Einstein said: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
Not everyone understands like an Einstein. So let’s look at a case study: call her Credit Card Kelly.
Once upon a time, there was a girl name Kelly. She was a lovely lady who loved life. She decided she was going to start a savings plan and take full advantage of living as an expat in the UAE.
Kelly was lucky. She got a huge bonus of Dh120,000. She was delighted, as she had a nasty little debt which had grown and grown. It was an honest debt; not due to frivolous spending on clothing but rather a loan for her rent which was due 12 months in advance.
The problem was, she didn’t pay it off straight away, opting for a fun weekend here and there. So her Dh80,000 loan turned into Dh100,000 and then Dh120,000. This is what happens when you don’t keep up with your repayments.
Lucky for Kelly, she got a bonus and paid off her debt. She promised herself that she would make changes and learn from her mistake. She was going to invest Dh7,500 a month for her retirement.
But she was running late meeting her financial adviser and cancelled the appointment, deciding instead to pop into Jimmy Choo where she found a pair of shoes on sale. Given her good luck, she decided to reward herself for paying off her loan and buy the shoes before she started saving.
And so began the pattern again.
And just like before, her credit card debt grew. Kelly, ashamed of her mounting debt, never met her adviser again. She buried her head in the sand. That was 2008. Had Kelly met her savings plan, her investment would have grown over the past few years. And if you think about that Dh7,500 over 48 months – not even taking growth into account, she would have saved Dh360,000 by now.
Instead Kelly continued to buy shoes and is again Dh120,000 in debt on her credit card.
Now do you want to understand the power of compound interest?
Let’s take a look here ...
When people talk about compound interest, more often than not, they talk about it working in your favour. The harsh reality is that compound interest also works against you if it’s on your credit card. Credit card debt can be incredibly destructive.
If you knew the top you were buying was not Dh1,000 but in actual fact Dh5,000 by the time you had truly paid for it (when you finally paid off your credit card), would you ever have bought it?
This is how compound interest works against you. It is imperative for a smart shopper to understand this.
One of the first steps towards sorting things out, is to make sure that you take advantage of the miracle of compound returns. Get your credit card out of sight and make your money work for you. The beauty of compound interest is that the rules don’t automatically change when you start playing for the other team – they remain the same.
Do you know the interest rate on your credit card or the amount it changes over time?
The scenario below illustrates compound interest. If you were given a choice to receive a million dollars in a month or a penny doubled every day for 30 days, which one would you choose? Let’s take a look at the calculations.
Day 1: $.01
Day 2: $.02
Day 3: $.04
Day 4: $.08
Day 5: $.16
Day 6: $.32
Day 7: $.64
Day 8: $1.28
Day 9: $2.56
Day 10: $5.12
Day 11: $10.24
Day 12: $20.48
Day 13: $40.96
Day 14: $81.92
Day 15: $163.84
Day 16: $327.68
Day 17: $655.36
Day 18: $1,310.72
Day 19: $2,621.44
Day 20: $5,242.88
Day 21: $10,485.76
Day 22: $20,971.52
Day 23: $41,943.04
Day 24: $83,886.08
Day 25: $167,772.16
Day 26: $335,544.32
Day 27: $671,088.64
Day 28: $1,342,177.28
Day 29: $2,684,354.56
Day 30: $5,368,709.12
Now what happens when we move from day 30 to 31? Yes, it doubles.
Day 31: $10, 737,418.24
That’s a pretty powerful penny.
The moral of this story is that investment is not about market timing, it is more about time in the market.
Janelle Malone is a wealth commentator, writer and author. You can read her blog at www.womenmoneyandstyle.com
COMPANY PROFILE
Initial investment: Undisclosed
Investment stage: Series A
Investors: Core42
Current number of staff: 47
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Company%20Profile
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