One of the simple changes you can make to your finances is to save at least 10% of your net income. But let’s take that one step further. The world’s way says to “borrow and consume”. God’s way is to “save and invest”.
Albert Einstein is believed to have said that “Compound interest is the greatest maths discovery of all time”. I actually think a better one is multiplication. But lets explore both, as they are powerful concepts for money management.
When it comes to interest, there are two types, simple interest and compound interest. Simple interest as the table below illustrates is where you earn interest only on the original principal. In this example you can see that $10,000 over a 12 year period would grow to $16,000.
| SIMPLE INTEREST | ||||
| Period | Principal | Rate | Interest $ | Investment Incl. Interest |
| 1 | $10,000.00 | 5% | $500.00 | $10,500.00 |
| 2 | $10,000.00 | 5% | $500.00 | $11,000.00 |
| 3 | $10,000.00 | 5% | $500.00 | $11,500.00 |
| 4 | $10,000.00 | 5% | $500.00 | $12,000.00 |
| 5 | $10,000.00 | 5% | $500.00 | $12,500.00 |
| 6 | $10,000.00 | 5% | $500.00 | $13,000.00 |
| 7 | $10,000.00 | 5% | $500.00 | $13,500.00 |
| 8 | $10,000.00 | 5% | $500.00 | $14,000.00 |
| 9 | $10,000.00 | 5% | $500.00 | $14,500.00 |
| 10 | $10,000.00 | 5% | $500.00 | $15,000.00 |
| 11 | $10,000.00 | 5% | $500.00 | $15,500.00 |
| 12 | $10,000.00 | 5% | $500.00 | $16,000.00 |
| COMPOUND INTEREST | ||||
| Period | Principal | Rate | Interest $ | Investment Incl. Interest |
| 1 | $10,000.00 | 5.00% | $500.00 | $10,500.00 |
| 2 | $10,500.00 | 5.00% | $525.00 | $11,025.00 |
| 3 | $11,025.00 | 5.00% | $551.25 | $11,576.25 |
| 4 | $11,576.25 | 5.00% | $578.81 | $12,155.06 |
| 5 | $12,155.06 | 5.00% | $607.75 | $12,762.82 |
| 6 | $12,762.82 | 5.00% | $638.14 | $13,400.96 |
| 7 | $13,400.96 | 5.00% | $670.05 | $14,071.00 |
| 8 | $14,071.00 | 5.00% | $703.55 | $14,774.55 |
| 9 | $14,774.55 | 5.00% | $738.73 | $15,513.28 |
| 10 | $15,513.28 | 5.00% | $775.66 | $16,288.95 |
| 11 | $16,288.95 | 5.00% | $814.45 | $17,103.39 |
| 12 | $17,103.39 | 5.00% | $855.17 | $17,958.56 |
The Power of compound interest. Look at the power of starting with a $10,000 investment and saving $500 per month to it. In 30 years it would be worth over $1.3Million.
Lastly, and my favourite is invest in things that multiply. But what is multiplication? Think for a moment of the remarkable human body that is made up over a trillion cells. Starting from one cell, your cells have split millions of times over to form the organs and tissues that make up the human body. You are a walking miracle. This same concept of multiplication can be applied to many facets of life from ministry to business.
Let’s look at two business models, one old school and one in our new internet area. McDonalds was commenced in 1955 and has grown to have more than 35,000 stores in 119 countries. Their multiplication model – Franchising. This model enables you to use the capital and entrepreneurial passion of other business owners whilst building your own business. Many of the world’s most successful businesses are franchises.
In the internet era, we have Facebook, one of the fastest growing businesses of all time, with more than a billion users. Non-existent 20 years ago, it has multiplied many times over in its short life.
This is not about trying to find the next Facebook or McDonalds, but more about encouraging you to research and invest in businesses that multiply. If the truth be known the best form of wealth creation in society has always been and still remains to be small business. A great book by William Danko and Thomas Stanley by the name of the “The Millionaire Next Door” illustrates this point, that most people who are wealthy are the small businesses next door, not the Wall Street executives that the media likes to show.
In short – save 10% and invest in things that multiply!