Turn $3,333 into $39 million

BY Dennise Williams williamsd@jamaicaobserver.com
Sunday, December 02, 2007

Let's be honest - $3,333 isn't an earth-shattering amount of money. Twenty-year-old Cory Jones told Sunday Finance that he spends $3,333 in a night hanging out with friends.

Tim Benson, a 30-year-old graphic artist snapped his fingers when we asked how quickly he could spend $3,333. So, if we can spend this sum in a blink of an eye, then it shouldn't be so hard to save it.

Let us say that you decide to do just that - save $3,333 per month. Not a lot, but depending on how old you are, it can add up to a significant sum of money. For a 25-year-old who saves $3,333 per month in a tax-free instrument paying at least 12 per cent per annum, he will have $39.2 million by the time he is 65.

A 35-year-old who saves the same amount in the same tax-free instrument will have $11.6 million in 30 years. A 45-year-old will have $3.2 million and a 55-year-old will have $767,000. Obviously, the younger you start the more you will have. However, several things have to happen first.

First, you have to make the monthly commitment. Second, you have to find a tax-free investment - and in this case we suggest that you consult your friendly mutual fund or unit trust broker. Third, you can't take out the money because your car broke down or something like that.

You have to let the funds compound. And to the naysayers out there that snicker and point out that the quoted sums won't be worth anything in 40 years because of this and that in Jamaica - who says you only have to save just $3,333? Save more and you will have more.

These calculations are courtesy of the new book by Oran Hall and W St Elmo Whyte. In their book, The Handbook of Personal Financial Planning, the two tackle the topic of personal financial planning in the Jamaican context in a straightforward manner that is ideal for someone serious about planning out their financial life.

Throughout the 202 pages, practical tips and advice are offered with a view to strengthen the readers net worth. And this an important book because as personal finance aficionados know that when you are looking for information, you have to look to North American writers such as Suze Orman or websites like MSN.com. This book tackles the reality of investing in Jamaica from your first job to estate planning.

However, it is not until the end of the book, in the Appendix section that the real action takes place. Under the heading The Power of Compounding, the authors offer an eye opening array of returns that investors can receive by retirement if they invest small amounts on a consistent basis. The authors also show the power of tax free investing.

We have illustrated one above. Another interesting scenario is the chart that shows how much you have to save in a tax-free instrument paying 12 per cent per year to achieve $30 million by age 65. For example, if you are 25 years old then the figure would be $2,525 but if you wait until 55 that monthly savings jumps to $129,000. It is the power of compounding that makes the difference in what returns individuals can receive.