Formula for wealth creation

During one of the programs to launch the book, I was asked by a friend: “Is there a formula for creating wealth?”

After a brief thought, I could think of the most appropriate answer, “Yes, there is, and we were taught it in secondary school. It is popularly known as the compound interest equation.”

The formula is as under:

FV = PV * (1 + r/100) ^ n

Where,

FV = Future value = the wealth you wish to accumulate

PV = Present value = the amount you are investing

r = rate of interest = the rate at which your investment grow, and

n = number of compounding periods = the period over which you earn not only on the investment, but also on the returns generated as the investment returns are reinvested

It is believed that Albert Einstein called this formula “the eighth wonder of the world”. He added: “Those who understand, earn it; those who don’t understand, pay it.”

 

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Think, does it really work?

In 2014, a news story int he Times of India caught my attention. A very well known movie star lodged a complaint with the Mumbai police. He had been duped. The con artist had promised to double his money in 45 days and then disappeared. The movie star could not believe that such a fraud was possible. The lure of the high “guaranteed” returns blinded him.

Just to put things in perspective, we present some calculations here. Assume that such a scheme is really available. Assume that one has an option of reinvesting the money in the scheme any number of times.

The scheme would double the amount invested every 45 days, or every 1.5 months. Ethos rate, Rs. 1,000 can grow to Rs. 2.56 lacs in one year, Rs. 6.55 crores in 2 years, and more than Rs. 1,677 crores in 3 years.

At the end of fourth year, one would have accumulated a sum of Rs. 4,29,496 crores. Compare this to India’s fiscal deficit for 2013-14: Rs. 4,90,597 crores.

Think, does it really work? Ask questions. When you are presented with a mouth-watering investment opportunity, your responsibility towards your money is even higher.

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