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When it comes to financial planning, taking a reliable approach rather than swinging for the fences can yield incredible results. If you have the patience, it is remarkable what is possible if you focus on low-risk cash flow, rather than relying on asset appreciation.
In this article, we will look over some of the fascinating examples of compounding interest by investing in reliable cash flow over the long term and how to use a financial calculator. In all of the examples we will be using an 11% return because it is a very achievable yield, through many of the most popular cash flow investments. In previous articles, I have discussed how to achieve these returns without exposing yourself to unnecessary risks.
If you are pursuing being a real estate investor it is crucial that you understand how to to use a financial calculator. In these examples, I will be using the 10bii calculator to solve the problems below. If yo
If you want to complete these problems on your own, make sure your calculator is set to 12 payments per year, because we will use monthly payments in all of these examples.
Remember: when you are making payments, the number will be negative, when you are receiving payments, the number will be positive.
How To Use A Financial Calculator Example #1
If you deposit $30,000 in a trust account for your child the day he is born and invest it at 11% with no withdrawals or contributions, how much will the trust be worth when he is 22?
Instead of buying a new car, invest that money for your children and you will be glad you did. $300,000 could really open up some doors to a recent college graduate looking to start a career. There are also many tax benefits for creating a trust like this, making trusts a great way to invest wealth over the long term.
How To Use A Financial Calculator Example #2
You are 30 years old and you are making enough money to begin investing, but you have $0 current net worth. You have created a budget for yourself and realize that you could save an extra $100 a month if you cut some unnecessary expenses out of your monthly plan.
If you are 30 and invest $100 a month @ 11% what will you have when you are 65?
How easy would it be for you to save $100 a month? If you are able to invest that extra $100 a month at 11%, over the 35 years, the difference will be almost a half a million dollars. The interesting part about this example is that your initial net worth is $0. If you start with a measly $100 monthly investment, over the long term, it will turn into a fortune.
How To Use A Financial Calculator Example #3
Let’s say that you have accumulated $250,000 to invest by the time you are 40. You invest the $250,000 at 11% and you need to spend $2,000 of the monthly income that your investments generate. What do you have when you are 70?
In this example, not only would you be able to spend $2,000 a month while you are investing, by the time you turn 70, that $250,000 will be worth more than $1,000,000.
What if you are in the same situation but need to spend $2,380.81 a month, instead of $2,000? What do you have when you are 70?
That’s right, you read correctly. If you spend $2,000 a month, by the time you are 70, you will be a millionaire. However, if your expenses end up being $2,380.81 by the time you are 70, you will be dead broke! This is a perfect example of why it is important to invest now and spend later. The outcome is exponential… literally!
Don’t be misled by the size of these numbers, the math is correct. All of these examples are feasible if you have the ability to invest now and spend later. At first, the compounding interest will be small, but eventually, that financial snowball will really start to gain some momentum and you will benefit in the future.