The use of Mutual Funds and Compound Interest
The Mutual fund is an old, but trending tool to use increase returns. The exact Google definition of a mutual fund is an investment program funded by shareholders that trades in diversified holdings and is professionally managed.The creation of mutual fund is highly disputed. The creation is usually credited to two men.
These two men are Driaan Van Ketwich and King William I. King William was the King of the Netherlands from 1815 till 1840. William was born in 1772 in The Hague Netherlands, and died in 1843. Driaan Van Ketwich, the other man that may have invented the mutual fund was Dutch merchant. Ketwich created an investment trust that is rumored to have possibly given King William the Idea for the Mutual fund. The early mutual fund spread through the much of Europe, then like most trends it spread to the United States, in the 1890’s.
The Massachusetts Investors’ Trust was the first modern mutual fund. The Massachusetts Investors’ Trust was created in Boston Massachusetts, and went public in 1928. In 1929 before the Great Depression there were 19 open ended mutual funds, and 700 close ended mutual funds. After the great depression only the open ended mutual funds survived. In 1950 the number of mutual funds reached 100. This number doubled in the 1960’s.
Max Heine, Michael Price and Peter Lynch are often associated with the 1980’s and 1990’s mutual funds. These years are sometimes called the Golden Years of the mutual fund. The mutual funds experienced some turmoil in the early 21st century. In 2003 there were mutual fund scandal, and the mutual fund had to survive the rescission in 2008-2009. Today there are over 10,000 mutual funds.
Compounded interest is a double edged sword that in your favor can help to create a pleasurable and relaxing retirement. Compounded interest may appear to be a new calculation used in modern investments. In 2000 BC ancient merchants used stone tablets to calculate interest. A clay tablet depicts a calculation of the time it takes for 20% interest to double. This tablet is now housed at the Louvre.
In London in the early 1200’s dues were paid to lenders as “every two months one mark for every ten marks as a recompense for losses- a 60% gain.”- John H. Webb. The invention of logarithms brought the modern compounded interest formulas. Logarithms were invented by John Napier in 1614. The simple compounded interest formula created thousands of years ago is still use today to calculate compounded interest.
The compounded interest formula can be used to calculate the interest gained in a mutual fund. The formula to use is P= M ((1+i/q) ^nq-1) (q/i) in which P = the principal after n years, M = the deposit amount, i = interest rate, q = number of periods in a year, and n = number of years. This amount of money gained through a mutual fund can be used for a comfortable prosperous retirement. Many people cannot or do not take advantage of mutual funds. The average person retires with only $43,797. $43,797 does not last well through retirement, but a million would be much more comfortable.
There is no guarantee on mutual funds. According to the well known investor Dave Ramsey, it is possible to gain an average of 12% interest from a mutual fund. These interest rates are earned by investing in mutual funds in the S 500. It is important to remember that 12% is an average; Ramsey stated that your yearly return may be much higher or lower than the average. It is best to ride-out these fluctuations in interest rates and returns.
The goal of this project is to illustrate how to accumulate one million dollars in a mutual fund. Many people do not take into account the how long they live after they retire. The average retired person lives 18 years after retirement. Another part of retirement that goes unaccounted for is the cost of living after retirement. It is simple to calculate the annual income needed.
A person’s income should stay the same before and during retirement, to keep living comfortably.A million dollars spread over 18 years should provide sufficient income, also with the possibility of having social security as a secondary source of income. To secure one million dollars or more is a great feat, and cannot be underestimated. To reach this goal may seem simple, and is considerably simple to explain and execute. When it comes time to try to reach this goal dedication is crucial. It will take monthly self control and self limitation.
To calculate the capital gained at retirement after “cashing out” your mutual fund, the compounded interest formula with regular deposits will be used. This equation is: P= M ((1+i/q) ^nq-1) (q/i) in which P = the principal after n years, M = the deposit amount, i = interest rate, q = number of periods in a year, and n = number of years. M would equal 1800 dollars, which divide by twelve months in a year would equal a monthly rate of 150 dollars. i equal 10%. Ten percent would be a conservative estimate of the average percent of returns. q equals 1 because the returns would be compounded annual.
M equals 45 since fulfilling our goal of having one million dollars or more will take a long time. 45 years would be an accurate number, since most people would begin employment around 17 years of age. It is important to start saving for retirement from an early age. At age 17 then 45 years later you would be 62, which is the average retirement age for Americans (Statistic Brain). Now the equation would look like this P=1,800 ((1+0.10/1) ^45*1-1)*(1/0.
10). Then by solving this equation we find our most important variable; P. This is the end amount, and something that the investor has been working for his whole life. P equals $1,294,028.71. This greatly surpasses our goal of one million.
The entire completed equation is: 1,294,028.71=1,800 ((1+0.10/1) ^45*1-1)*(1/0.10). If the equation was graphed it would show an exponential curve, as all interest formulas show a similar curve. $1,294,028.
71 is a lot of money, and will require a lot of discipline to spend wisely. Retired people have a lot more time, and so then they are tempted to make more expensive purchases. People over 50 account for 80% of all luxury purchases. With that much money many possibilities arise. With $1,294,028.
71 a person could purchase 41, 2014 model 5.0 liter Mustang GT’s (Ford). A person could stay 28 nights in the penthouse at the Four Seasons in New York City, New York, and still have some cash left over for room service.
Although these may be enticing they are not practical. The key to financial stability is moderation. A nice car or relaxing vacation is ok as long as it is not extreme, or every day. The average person is retired for 18 years, so dividing 1,294,028.71 by 18 will equal the annual income for the retiree.
This annual income would be $71,890. This would be more than enough for most retired people considering by age 62 most of them will have finished paying their mortgage. These retires may even have money left over to invest, or start funds for their children, and continue the trend of financial responsibility.