Dollar Cost Averaging

Here's another financial tip. Dollar Cost Averaging or DCA in short. Which is a terminology that says one should invest into the market bit by bit instead of putting one lump sum, because the former ended up produced more shares/units which yield to higher in return.

Let's say Andy and Tony would like to invest $3,000 into the same fund. Andy make it a lump sum investment at the beginning of the year, while Tony spreads his investment into 12 payments, which equivalent to $250 per month.

Believe it or not, at the end of the year, Tony will have an investment that is worth more than Andy although they investment in the same fund and enjoying the same buy price and sell price throughout the year.

	Andy: Lump Sum Investment	Tony: Dollar Cost Averaging
Average Price/Share	$10.00	$9.25
Shares Accumulated	300	332.94
Current Value (12 months)	$3,000	$3,329.37

What actually happening is when the share price drop, Tony able to absorb more units and while the share price rise, Tony will buy in less units since he invested in a bit by bit manner. Perhaps you can have a better illustration from the image below :)

Source: http://www.bt.com.au/investors/investment-education/investment-basics/basics_12.asp

The Power of Compound Interest

"The most powerful force in the universe is compound interest." - Albert Einstein
Yes. As what Albert Einstein said, we should not under estimate the power of compound interest. Many knows how it works but not many actually knows it's power is strongly related to the time you start putting in your capital. In other word, WHEN you actually start your saving? Let's take a look at the example below:

Let's say Albert and Einstein both are 22 years old and wanted to retired at age of 65. Albert saves $2,000 yearly into the account which produce 12% of interest. This account will compounded it's interest yearly and added on top of Albert's next year savings. Albert only planned to save for 6 years period which is a sum of $12,000 and he did not put in another single cent from 7th years onwards. However the account will keep compounding the interest.

As for Einstein, he decided to save into the same account which produce the same 12% annual interest, but he only started the saving 6 years later, which is after Albert has stopped the saving. Knowing that he's a bit late compare to Albert, Einstein decided to save in $2,000 every year until his age of 65. His total saving capital will be $2,000 x 38 years = $76,000. However, due to Einstein started the saving few years later than Albert, although he saved 6 times more than Albert, yet he is only getting the similar amount as Albert's retirement fund.

Age	Albert	Einstein
22	$2,240	$0
23	4,509	0
24	7,050	0
25	9,896	0
26	13,083	0
27	16,653	0
28	18,652	2,240
29	20,890	4,509
30	23,397	7,050
35	41,233	25,130
40	72,667	56,993
45	128,064	113,147
50	225,692	212,598
55	397,746	386,516
60	700,965	693,879
65	1,235,339	1,235,557

Now you can really see the power of compound interest. The moral of the story is: Save early better than later, every single year counts.

The Rule of 72

Always wanted to share with people what I have known about some basic financial knowledge. In this case will be The Rule of 72. This rule is a simple yet accurate formula to calculate interest rate or period as in year.

For instance, by knowing the annual average interest rate of a bank is 8%, the period that it will take for your capital to double up will be 72 / 8 = 9 years.

Similarly, by knowing the average inflation rate is 6%, the period of a product that will raised from it's initial cost to a double will be 72 / 6 = 12 years.

Of course you may also calculate the interest rate or inflation rate base on the given period. Let's say you can actually know what is the interest rate have to be if you would like to have your capital to be doubled up in 24 years time. Just simply apply 72 / 24 = 3%

As I said, this formula is rather simple yet useful :)