The Five Laws of Gold

The principles below are from the book “The Richest Man in Babylon” by George Samuel Clason. The novel is made up of clever analogies that promote financial wisdom and managing household finances more efficiently.

  • 1) Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family. (Save 10%)
  • 2) Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field. (Keep the money working diligently in profitable scenarios)
  • 3) Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling. (Keep a Wise Council)
  • 4) Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep. (Invest in what you know and understand)
  • 5) Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment. (If it is too good to believe, it probably is.)Using these laws of gold, Nomasir became rich. “Yet, who can measure in bags of gold, the value of wisdom? Without wisdom, gold is quickly lost by those who have it, but with wisdom, gold can be secured by those who have it not, as these three bags of gold do prove.”A small passage from the novel that I believe to be valuable to anyone, even the people that may be foolish enough not to read the entire book or at least put aside the time to listen to the audio link attached below. (Youtube)

    Finally I leave you with a quote from the Richest Man in Babylon,

    “Advice is one thing freely given away, but watch that you take only what is worth having.”

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Compound Interest, Passive Investing & Time

The idea for this blog post came to me after re-thinking what I have been for years on a daily and weekly basis. How to compound my savings from 20-35 earnings age into a small fortune by the time I reach the age of 60 years old. Most people have heard of the rule of 72 in relation to compound interest and finance. If you haven’t heard of it, I will explain it briefly here.

Now back to the original strategy of allowing your earlier years of work to reap hefty rewards or as the saying goes, “From a small seed may a mighty trunk grow.” – Aeschylus

< The Problem >
Save 2M of today’s dollars for retirement.
25-Year Average Inflation 2.89%
25-Year Average Annual Return of S&P 500: 11.01%
25-Year Average Real Return: 8.12%

FV = PV(1+ R) (to the power of n)

FV= Future Value
PV= Present Value
R= Rate of Return
n= Number of compound periods (I used years)

Using an average annual salary of 50K and a 40% savings rate from 20-35 you would be left with a sum of around $300,000 (We will assume you did not invest the 300K up until 35 and have achieved no return until now, VERY UNLIKELY, so the beginning sum may actually be quite larger)

FV=         300,000 (1+0.1101) (To the power of 25)
FV=         4,084,828.44 at the age of 60

Now this is not a very complicated approach to saving/investing and could be done through a passive investment in a low cost index ETF, accompanied by a buy & hold forever commitment.

The formula may be changed to assume lower or higher sums of money, compounding periods, or rate of return.

Due to annual inflation the Real Return would more accurately reflect your retirement purchasing power in todays dollar.

FV= 300,000 (1+0.0812) (to the power of 25)
FV= 2,112,380.65 at the age of 60

This calculation paints an increasingly bleak picture about the invisible tax policy implemented by central banks and policy makers, Inflation. But the bright side being the 2nd calculation excludes inflation leaving you with a real return or an equal amount of purchasing power in the future.

Now 2.1M (real dollars) or 4.08M (nominal dollars) may or may not be enough for your retirement depending on your desired lifestyle and leisure activities but this is besides the point. With a passive investment technique and no actual knowledge of the subject or ability to pick individual stocks has to be used. It is simply a low cost option that can be the foundation for a beginner investors portfolio. The commission fees, management expenses and taxes are all left at a minimum, allowing growth to truly take place for the individual investor.

“Compound interest is the 8th wonder of the world. He who understands it, earns it……he who doesn’t……pays it.” – Albert Einstein

(1930-2012 S&P 500, P/E ratio, Inflation, Data Available Below)

S&P 500

The Rule of 72

The rule of 72 is a great estimation tool to replace a Future Value formula in finance. It is a relatively easy calculation, doable in your head with a grade 5 math level. The rule of 72 is simply a calculation of how long it will take to “double your money” using a specified rate of return. You take the rate of return and divide it by 72 giving you the appropriate amount of years needed for a double.

72 / 10% return = 7.2 years to double.

The formula can also be used inversely to calculate a reduction of half the capital using the inflation rate divided by 72.

72 / 2.5 = 28.8 years to have your capital halved

Inflation is often overlooked but should not be as it is an invisible tax and a consequence of investing too conservatively, (i.e T-Bills, Money Market)