29 February 2016

The needs for Investment

I still remember when my dad was still around (in the 1990s), he used to tell me not to anyhow spend money and also teach me to be frugal. He used to tell me "Do you know that last time a plate of Char Kway Teow (aka fried noodle) only cost $0.50 - $0.70 (1980s)? Now it cost $1.50-$2!"

Now in the year of 2016, a plate for Char Kway Teow easily cost $3-$4.

What are the rate of inflation?

Lets do the math!

From 1980s till today, in the course of about 35 years, annualized inflation rate for a plate of Char Kway Teow is:

Step 1: $4 - $0.50 = $3.50
Step 2: ($3.50 / $0.50) x 100% = 700%
Step 3: 700% / 35 years = 20%


How about  CAGR (Compound Annual Growth Rate) of a plate of Char Kway Teow? Let's find out!

Step 1: [($4/$0.50) ^ 1/35] - 1
Step 2: (8 ^ 0.02857) - 1
Step 3: 1.0612 - 1
Step 4: 0.0612 x 100% = 6.12%

Oh my goodness, a plate of Char Kway Teow annualized inflation is 20% from 1980s till today and the compounding growth rate of it is 6.12%! Are your salary able to keep up with the inflation of a plate of Char Kway Teow? Did your salary increase by 20% (annualized per year) or are you able to compound your investment by 6.12% ever since you started work till now? If the answer is yes, good for you because you have the same purchasing power from the moment you started work till now and likely you won't feel any pressure or stress for inflation. For those who answer is no, what should you do?

Invest lor! Yes! That's the answer! Why is that so? Imagine, you are the share owner (due to your investment) of the Char Kway Teow stall, over years with the price of a plate of Char Kway Teow increase, definitely you will get increase in profit (assuming with the proportionate increase of revenue and cost of goods sold)!

So the real intention of investment is not really to become rich (though likely you will become wealthy over time due to reinvestment), it is to maintain the same amount of purchasing power overtime!

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