I have just realized, after looking into one of our company benefits, that without me doing anything, I'll be an instant millionaire.*
How?
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Through the power of compounding.
Every payday, Php 500 is deducted in my salary until my retirement. It is being invested at a rate of 6.5% per annum - that's 0.2708% every payday (6.5%/24 months). I started contributing August 15, 2011. I plan to retire at 60 years old (end of December 2042). By then, I already made an accumulated contribution of Php 377,000.
But here's where the magic happens.
The interest accrued is being reinvested allowing my principal to grow, hence a a larger amount is to be expected.
For example: Php 500 is placed every year for 5 years at a rate of 6% p.a. On year 2, the Php 500 invested in year 1 will earn Php 30 (500 x 6%) and so on until year 5. At the end of year 5, I'll be getting Php 2,818.55.
This can be simplified by this formula:
You can also do it via Excel's Future Value Formula:
Note: The formula above assumes that (1) the rate will not change; (2) the periodic payment does not change; and (3) my first payment is one period away (all of which still holds true as of the moment)
So, having said that, my Php 500 per payday will be a cool Php 1,234,228.50 in 2042. Take that, Bruno Mars! I will be adding more to that Php 500. After all, it is never too early to plan for your retirement.
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*of course, that is if I don't become jobless or die before it is due (whichever comes first).
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