Theory | wealthymatters

CAGR Calculator

January 26, 2011 15 Comments

Compound Annual Growth Rate (CAGR) is a measure that can tell us just how well any of our investments have done.We just need to know the price at which we bought the investment,the current market price of the investment and the number of years that we have invested in it to calculate CAGR.

We could of course key in this data into the compound interest formula and solve for the rate to get CAGR but here is a readymade calculator to figure out CAGR.http://www.investopedia.com/calculator/CAGR.aspx.

CAGR can be used for all types of assets :bullion,real estate ,securities and even businesses.We can use CAGR to compare individual investments against some benchmark,or two investments within the same asset class and even investments across asset classes.We can calculate CAGR of incomes, profits etc.too.This should help us figure out how profitable it is to invest in our own businesses so that we can decide whether we can accumulate more wealth as business people or investors.Also we could treat our own lives as businesses.Of our many income producing activities, CAGR can help us figure out out which activities produce the highest return.CAGR is thus a great productivity enhancing tool.

There is only one danger in using CAGR figures,it masks extreme volatility and periods of negative returns.So, for example, before we abandon some income producing avenue just because its CAGR is lower than another we need to check if the volatility in the higher CAGR line is something we can live with.So, if doing something produces returns in fits and starts or even forces us to live with losses for a while we need to figure out a way to sustain ourselves and the activity in the low or negative return phase.

Filed under Theory, Tool Kit Tagged with CAGR, CAGR Calculator, Calculator, Compound Annual Growth Rate, Compounded Annual Growth Rate

Benjamin Franklin’s Gift

January 25, 2011 3 Comments

Yesterday while searching for a graph to illustrate how important time is to compound interest,I came across a wonderful post at http://www.crackerjackgreenback.com/the-basics/compound-interest-a-lesson-from-benjamin-franklin/ .Here it is in full below.

In 1785, French mathematician Charles-Joseph Mathon de la Cour wrote a parody of Benjamin Franklin’s ‘Poor Richard’s Almanack’. The Frenchman called his parody ‘Fortunate Richard ‘and, attempting to mock the American optimism so well-represented by Franklin, wrote that Fortunate Richard left a small sum of money in his will to be used only after it had collected interest for 500 years.

Mr. Franklin thought the idea was fantastic and wrote back to Monsieur de la Cour thanking him. Franklin decided to leave a bequest of £1,000 (about $4,550 at the time of his death) each to his native hometown of Boston and adopted hometown of Philadelphia on the condition that it gather interest for 200 years. Franklin believed 200 years was the maximum length of time any person should be able to control assets from beyond the grave.

The Strings

In 1789, Benjamin Franklin added a codicil, or supplemental provision, to his will providing about $4,550 each (about $108,000 in 2008 dollars) to Boston and Philadelphia. Mr. Franklin stipulated that the funds should be used to make loans at 5% interest to young craftsmen under the age of 25 to help them set up their businesses. The loans were to be given only to those craftsmen who were married, had completed their apprenticeships, and could obtain two co-signers to vouch for them.

After 100 years, each city was to take 75% of the fund to use for public works (like bridges, pavement, public buildings, and the like). They were to then continue loaning the money for another 100 years. At the end of that 100 years, each city would get about 25% of the money and their respective states would get the rest. Had Boston and Philly followed through with Franklin’s wishes successfully, they would each have had nearly $20,000,000 in their funds at the end of the 200 years. Read more of this post

Filed under Philanthropy, Theory Tagged with Benjamin Franklin, bequest, Boston, Charles-Joseph Mathon de la Cour, fund, Philadelphia, Philanthropy, Will

Compound Interest

January 24, 2011 24 Comments

We all pick up some pretty important stuff in primary school but it’s doubtful if we really appreciate their importance at the time.Compound interest is one such thing.For many people it’s a formula to be memorized to pass a few math tests only to be forgotten or at least be pushed back to the recesses of their minds along with all the rest of the facts memorized in childhood.

To refresh memories, compound interest is the type of interest calculation where periodic interests accrued are not paid out but retained and the accrued interests earns interest . The formula for calculating compound interest is:

$A = P\left(1 + \frac{r}{n}\right)^{nt}$

Where,

A = final amount
P = principal amount (initial investment)
r = annual nominal interest rate (as a decimal)
n = number of times the interest is compounded per year
t = number of years Read more of this post

Filed under Theory, Tool Kit Tagged with Calculators, Compound Interest, Compound Interest Calculators, wealth

Investing in Gold Sovereigns

January 23, 2011 26 Comments

The British sovereigns are gold coins with a nominal face value of one pound sterling or twenty shillings.They were first issued in 1489 and still continue to be issued till date. All post-1837 sovereigns are still legal tender in the UK.

The name “sovereign” comes from the large size and portraiture of the coin, the earliest of which showed the king facing, seated on a throne, while the reverse shows the Royal coat of arms on a shield surrounded by a Tudor double rose.

At the height of the British Empire, gold sovereigns were well regarded and accepted as money throughout most of the world and used to settle dues between countries.The gold-standard may be no more, but the good reputation of the gold sovereigns for purity persists to this day and they are the most widely traded semi-numismatic gold coins in the world.In many parts of the former British Empire sovereigns are included in prized jewellery. There is a ready market for these gold coins worldwide,especially in the commonwealth, so they are pretty liquid investments. Read more of this post

Filed under Alternative Assets, Precious Metals, Theory Tagged with 22 Carat Gold, 22 Karat, 22k, Alternative Assets, Bullion Investment, Bullion Purchase, Gold, Gold Investment, Investing In Gold, Numismatics, Passion Assets, Sovereigns

Inflation Calculator

January 22, 2011 24 Comments

Inflation affects the purchasing power of a currency.So the one lakh rupees of last year does not buy the same amount of goods and services as the one lakh rupees of today.To find out exactly how much a given sum of rupees of the yesteryears would have been able to purchase in terms of today’s rupees or vice versa we can use this nifty calculator at http://www.yetanothersite.com/inflation-calculator-for-india.htm .Also by assuming an inflation rate we can project how many rupees we might need in future to buy something which costs a certain amount today.

This calculator is a great help in financial planning.We can use it to estimate how much something might cost in future.So by feeding in today’s rates and an array of inflation rates we can estimate how much we need to put aside to buy a house in the future or to pay for a child’s college education or just to retire, depending on various inflation scenarios.As an additional check on our projections we can feed in the data from our parents or grand parents time and check it against today’s prices.So if we know for a fact that our parents managed to retire comfortably on xyz rupees we can take the same number xyz, assume an inflation rate and project it out to our own retirement horizon.Then if we have the same lifestyle as our parents in retirement we too should theoretically be able to enjoy our retirements.

This calculator can also help us estimate the real returns on our investments.So if we bought a house for x rupees 10 years ago and we know its resale value today,we can project out the inflation adjusted rate for x rupees and compare it with the resale value.Similarly we can use this calculator to find out the real returns on any investment avenues we might be considering.We could also key in the data for various assets we have purchased over time and see how inflation has treated assets of various classes.

Do play round with this calculator,the insights it will provide are priceless.

PS: for the missing figures you no longer have to guess.Plug in the figures from here:https://wealthymatters.com/2011/06/29/some-inflation-figures/ , available courtesy CRISIL.