Many Factors that Affect the End Value of an Investment Tables 15 through 18 below show how some factors, such as the beginning balance, the frequency of deposit, the time period (start date to end date), the interest rates, and when the deposit is made (e.g., on the first of the month or at the end of the year). affect the annual end value of an investment. Tables 15 and 18, deposits made at the end of the year on Year 1 will not earn interest until the end of Year 2. Note that the same holds true for deposits made at the end of the year on Tables 16 & 17, which begin at Year 10. All calculations for Tables 15 through 18 were done using the online calculator presented by Time Value Software for FundAdvice.com http://mutualfunds.about.com/gi/dynamic/offsite.htm?zi=1/XJ&sdn=mutualfunds&cdn=money&tm=264&gps=99_1092_1020_587&f=11&su=p649.0.147.ip_p284.5.420.ip_&tt=2&bt=1&bts=0&zu=http%3A//www.tcalc.com/tvwww.dll%3FSave%3FCstm%3Dfundadvice%26IsAdv%3D0%26SlvFr%3D6 Deposit is made on the first of the month or at the end of the year & POC. Table 15 Table 15 shows the difference in the end values of a $100/month investment (deposited on the first of each month) vs. a $1,200 annual investment (deposited at the end of the year). In both examples, the beginning balance is zero, the time period is 50 years, and the interest rate is 8%, compounded monthly. Year | Beginning Balance Zero Monthly Deposit $100 on the first of the month (e.g., 01/01/01) | Annual End Values in $ at 8% Compounded Monthly | Beginning Balance Zero Annual Deposit $1,200 at the end of the year (e.g., 12/31/01) | Annual End Values in $ at 8% Compounded Monthly | 1 | $100 | 1,244.99 | 1,200 | 1,200.00 (No interest earned yet) | Note: The Annual End Values for all subsequent end-of-year deposits of $1,200 reflect the interest earned on the previous year’s Annual End Value, plus the current end-of-year deposit of $1,200. For clarification on how the Annual End Values were computed, the calculations are shown in Column 4 for Year 2, 3, and 4 and would repeat until Year 50. 2 | 100 | 2,593.32 | 1,299.60 (Includes the 99.60 interest earned at the end of Year 2 on the initial 1,200 deposit made at the end of Year 1 ) + 1,200 (No interest earned yet on current end-of-year deposit) | 2,499.60 | 3 | 100 | 4,053.56 | 2,499.60 (Previous year’s end value) + 207.47 (Interest earned on 2,499.60) + 1,200 (No interest earned yet) | 3,907.07 | 4 | 100 | 5,635.00 | 3,907.07 + 324.28 + 1,200 | 5,431.35 | 5 | 100 | 7,347.69 | 1,200 | 7,082.15 | 6 | 100 | 9,202.54 | 1200 | 8,869.96 | 7 | 100 | 11,211.34 | 1,200 | 10,806.16 | 8 | 100 | 13,386.87 | 1200 | 12,903.07 | 9 | 100 | 15,742.97 | 1,200 | 15,174.02 | 10 | 100 | 18,294.62 | 1,200 | 17,633.46 | 15 | 100 | 34,603.85 | 1,200 | 33,353.28 | 20 | 100 | 58,902.08 | 1,200 | 56,773.39 | 25 | 100 | 95,102.70 | 1,200 | 91,665.74 | 30 | 100 | 149,036.04 | 1,200 | 143,649.96 | 35 | 100 | 229,388.39 | 1,200 | 221,098.43 | 40 | 100 | 349,100.99 | 1,200 | 336,484.70 | 45 | 100 | 527,454.30 | 1,200 | 508,392.43 | 50 | 100 | 793,173.21* | 1,200 | 764,508.43 | A monthly deposit of a smaller amount gives better results than a yearly deposit of a larger amount during the same period of time because of the power of compounding. Table 16 Table 16 shows the difference in the end values of a $1,000/month investment (deposited on the first of each month) vs. a $12,000 annual investment (deposited at the end of the year). In both examples, the beginning balance is zero, the time period is 50 years (in 5-year increments), and the interest rate is 8%, compounded monthly. Year | Beginning Balance Zero Monthly Deposit $1,000 on the first of the month | Yearly End Values in $ at 8% Compounded Monthly | Beginning Balance Zero Annual Deposit $12,000 at the end of the year | Yearly End Values in $ at 8% Compounded Monthly | 10 | 1,000 | 182,946.04 | 12,000 | 176,334.58 | 15 | 1,000 | 346,038.23 | 12,000 | 333,532.80 | 20 | 1,000 | 589,020.43 | 12,000 | 567,733.90 | 25 | 1,000 | 951,026.39 | 12,000 | 916,657.40 | 30 | 1,000 | 1,490,359.45 | 12,000 | 1,436,499.58 | 35 | 1,000 | 2,293,882.49 | 12,000 | 2,210,984.22 | 40 | 1,000 | 3,491,007.84 | 12,000 | 3,364,846.84 | 45 | 1,000 | 5,274,539.89 | 12,000 | 5,083,924.11 | 50 | 1,000 | 7,931,727.47 | 12,000 | 7,645,084.00 | Tables 17, 18, and 19 below show the Annual End Values of an investment, using an interest rate of 10%, rather than 8%, as shown in Tables 16 above. Table 17 Table 17 shows the difference in the end values of a $1,000/month investment (deposited on the first of each month) vs. a $12,000 annual investment (deposited at the end of the year). In both examples, the beginning balance is $1,000 and $12,000, respectively, the time period is 50 years (in 5-year increments), and the interest rate is 10%, compounded monthly. Year | Beginning Balance $1,000 Monthly Deposit $1,000 on the first of the month | Annual End Values in $ at 10% Compounded Monthly | Beginning Balance $12,000 Annual Deposit $12,000 at the end of the year | Annual End Values in $ at 10% Compounded Monthly | 10 | 1,000 | 207,552.02 | 12,000 | 228,109.54 | 15 | 1,000 | 418,924.27 | 12,000 | 449,262.34 | 20 | 1,000 | 766,696.92 | 12,000 | 813,127.02 | 25 | 1,000 | 1,338,890.36 | 12,000 | 1,411,796.83 | 30 | 1,000 | 2,280,325.34 | 12,000 | 2,396,793.62 | 35 | 1,000 | 3,829,276.73 | 12,000 | 4,017,417.64 | 40 | 1,000 | 6,377,780.29 | 12,000 | 6,683,844.82 | 45 | 1,000 | 10,570,855.97 | 12,000 | 11,070,941.28 | 50 | 1,000 | 17,469,760.85 | 12,000 | 18,289,070.28 | Given that all other factors are equal, the difference in the Annual End Values of the investments that started with a positive beginning balance (Tables 16 and 17 above) are significantly larger than the investments that started with a zero balance (Table 15). Table 18 Table 18 is a recap of Tables 16 and 17. The table shows the difference in the end values of a $1,000/month investment (deposited on the first of each month) vs. a $12,000 annual investment (deposited at the end of the year). A comparison is made between the beginning balance of zero and $1,000, respectively, for the $1,000/monthly investment and the beginning balance of zero and $12,000, respectively, for the $12,000 annual investment. End values for Year 10, 30, and 50 are shown, using an interest rate of 10%, compounded monthly. Beginning Balance in $ | Monthly Deposit in $ | Annual Deposit in $ | 10-Year End Values in $ at 10% Compounded Monthly | 30-Year End Values in $ at 10% Compounded Monthly | 50-Year End Values in $ at 10% Compounded Monthly | 0 | $1000 | XXXX | 204,844.98 | 2,260,487.94 | 17,324,390.93 | $1000 | $1000 | XXXX | 207,552.02 | 2,280,325.34 | 17,469,760.85 | 0 | XXXX | 12,000 | 195,625.04 | 2,158,744.86 | 16,544,631.44 | $12,000 | XXXX | 12,000 | 228,109.54 | 2,396,793.62 | 18,289,070.28 | To maximize earnings, consider all the factors that affect the end value of an investment. Impact of interest rates $ POC Tables 19, and 20 below show the significant increase in the rate of return on an investment that a difference in the interest rate as little as 1% can have over time. As with Tables 15 through 18 above, the annual end values in Tables 19 and 20 below are affected by when the deposit is made (e.g., on the first of the month or at the end of the year). Recall that a monthly deposit of a smaller amount of money generally gives better results than a yearly deposit of a larger amount during the same time period because of the power of compounding. The calculations for Tables 19 and 20 were also done using the online calculator presented by Time Value Software for FundAdvice.com. Table 19 Table 19 shows the difference in the end values of a $1,000/month investment (deposited on the first of each month) vs. a $12,000 annual investment (deposited at the end of the year), each using two different interest rates (8% and 9%, both compounded monthly). For all comparisons, the beginning balance is zero and the time period is 60 years. Y e a r | Beginning Balance Zero Monthly Deposit $1,000 on the first of the month | Annual End Values in $ at 8% Compounded Monthly | Annual End Values in $ at 9% Compounded Monthly | Beginning Balance Zero Annual Deposit $12,000 at the end of the year | Annual End Values in $ at 8% Compounded Monthly | Annual End Values in $ at 9% Compounded Monthly | 10 | 1,000 | 182,946.04 | 193,514.28 | 12,000 | 176,334.58 | 185,661.03 | 20 | 1,000 | 589,020.42 | 667,886.87 | 12,000 | 567,733.89 | 640,782.50 | 25 | 1,000 | 951,026.39 | 1,121,121.94 | 12,000 | 916,657.39 | 1,075,624.25 | 30 | 1,000 | 1,490,359.45 | 1,830,743.48 | 12,000 | 1,436,499.57 | 1,756,447.74 | 40 | 1,000 | 3,491,007.83 | 4,681,320.27 | 12,000 | 3,364,846.82 | 4,491,341.63 | 50 | 1,000 | 7,931,727.48 | 11,669,101.86 | 12,000 | 7,645,083.96 | 11,195,543.12 | 60 | 1,000 | 17,788,527.48 | 28,798,649.72 | 12,000 | 18,756,302.43 | 27,459,745.62 | Table 20 Table 20 shows the difference in the end values of a $1,000/month investment (deposited on the first of each month) vs. a $12,000 annual investment (deposited at the end of the year), each using two different interest rates (9% and 10%, both compounded monthly). For all comparisons, the beginning balance is zero and the time period is 60 years. Y e a r | Beginning Balance Zero Monthly Deposit $1,000 on the first of the month | Annual End Values in $ at 9% Compounded Monthly | Annual End Values in $ at 10% Compounded Monthly | Beginning Balance Zero Annual Deposit $12,000 at the end of the year | Annual End Values in $ at 9% Compounded Monthly | Annual End Values in $ at 10% Compounded Monthly | 10 | 1,000 | 193,514.28 | 204,844.98 | 12,000 | 185,661.03 | 195,625.04 | 20 | 1,000 | 667,886.87 | 759,368.84 | 12,000 | 640,782.50 | 725,190.14 | 25 | 1,000 | 1,121,121.94 | 1,326,833.40 | 12,000 | 1,075,624.25 | 1,267,113.49 | 30 | 1,000 | 1,830,743.48 | 2,260,487.92 | 12,000 | 1,756,447.74 | 2,158,744.83 | 40 | 1,000 | 4,681,320.27 | 6,324,079.58 | 12,000 | 4,491,341.63 | 6,039,436.85 | 50 | 1,000 | 11,669,101.86 | 17,324,390.80 | 12,000 | 11,195,543.12 | 16,544,631.17 | 60 | 1,000 | 28,798,649.72 | 47,102,689.68 | 12,000 | 27,459,745.62 | 44,982,628.07 | As defined on the Wikipedia Website: Return on Investment is a percentage [compound interest rate return based on capital invested. For more information on Return on Investment (ROI)/Rate of Return (ROR), go online to Wikipedia, the free encyclopedia. http://en.wikipedia.org/wiki/Return_on_investment To better illustrate how important the compound interest rate (e.g., 5%, 8%, 10%) is to the return on investment, refer to the post on the Free Money Finance blog (12:14 p. m. on April 20, 2006 in Investing) below: One other important fact about compounding is that a small increase in the rate of return [even as little as 1%] can produce a huge impact over time. In the case of the gift to your newborn daughter, if her portfolio returns 10% annually, then $10,000 grows to $4.5 million by the time she is 65. But if her portfolio returns 8%, then it grows to only $1.4 million. If it returns 5%, it grows to a mere $227,000. In other words, half the rate of return produces an account that's less than one-twentieth the size. Source: The Power of Compound Interest, April 20, 2006. freemoneyfinance Grow Your Net Worth. http://www.freemoneyfinance.com/2006/04/the_power_of_co.html Table 21 Table 21 shows the return on investment of a $100/month deposit (deposited on the first of each month), using interest rates from 5% to 12%, compounded monthly. For all examples, the time period is 55 years (in 5-year increments). Y e a r | $100 Monthly Deposit at 5% | $100 Monthly Deposit at 6% | $100 Monthly Deposit at 7% | $100 Monthly Deposit at 8% | $100 Monthly Deposit at 9% | $100 Monthly Deposit at 10% | $100 Monthly Deposit at 11% | 1 | 1,227.89 | 1,233.56 | 1,239.26 | 1,244.99 | 1,250.76 | 1,256.56 | 1,262.39 | 5 | 6,800.61 | 8,640.89 | 8,916.10 | 9,202.53 | 9,500.70 | 7,743.71 | 10,134.37 | 10 | 15,528.23 | 18,632.27 | 19,798.97 | 21,058.03 | 22,417.49 | 20,484.50 | 25,473.29 | 15 | 26,728.89 | 32,109.14 | 35,226.82 | 38,720.91 | 42,641.05 | 41,447.03 | 51,992.97 | 20 | 41,103.37 | 50,287.43 | 57,097.71 | 65,035.86 | 74,304.69 | 75,936.88 | 97,843.28 | 25 | 59,550.97 | 74,807.20 | 88,102.45 | 104,241.09 | 123,879.86 | 132,683.34 | 177,114.59 | 30 | 83,225.86 | 107,880.71 | 132,055.55 | 162,650.82 | 201,498.76 | 226,048.79 | 314,168.01 | 35 | 113,609.24 | 152,491.92 | 194,364.57 | 249,672.31 | 323,025.20 | 379,663.81 | 551,121.82 | 40 | 152,602.02 | 212,665.75 | 282,695.42 | 379,320.91 | 513,296.85 | 632,407.96 | 960,794.99 | 45 | 202,643.73 | 293,831.23 | 407,915.46 | 572,477.31 | 811,201.55 | 1,048,250.17 | 1,669,085.39 | 50 | 266,865.20 | 403,311.31 | 585,430.55 | 860,250.55 | 1,277,625.29 | 1,732,439.08 | 2,893,659.79 | 55 | 349,284.38 | 550,983.53 | 837,080.43 | 1,288,988.28 | 2,007,896.09 | 2,858,141.20 | 5,010,845.74 | Table 22 Table 22 shows the last row of Table 21 above separately to emphasize the tremendous impact that the compound interest rate can have on the return on investment over time. After 55 years, the end value of the investment with a 12% ROI would be $7,656,816.43 ($8,006,100.81 – $349,284.38 = $7,656,816.43) more than the end value of the investment with a 5% ROI. Y e a r | 5% | 6% | 7% | 8% | 9% | 10% | 11% | 12% | 55 | 349,284.38 | 550,983.53 | 837,080.43 | 1,288,988.28 | 2,007,896.09 | 2,858,141.20 | 5,010,845.74 | 8,006,100.81 | Note: The longer the money is invested and the higher the interest rate, the faster the investment will grow. The difference between starting early versus starting late when deciding to invest may greatly impact the investment’s end value. Without a doubt, time is the most powerful factor in the successful utilization of POC. Nothing can match time. As time passes, the power of compounding accelerates exponentially, leading to an end result that could be astounding. In his book, Multiple Streams of Income, well-known author and entrepreneur Robert G. Allen presents information to help people achieve financial freedom…on a dollar a day. An excerpt and a table from Allen’s book follows: Suppose you'd invested a dollar a day starting on the day you were born…[The table below] shows what you'd have at age 66. A dollar a day grows into $1 billion by the normal retirement age!...And what makes this happen? The power of compound interest makes a few dollars a day grow into enormous sums of money. Einstein himself said, "The most powerful invention of man is compound interest." Table 23 Table 23 shows result of a Dollar a Day Compounded at Various Rates for 66 Years Interest Rate | Cumulative Savings | 0% | $24,000 | 3% | $77,000 | 5% | $193,000 | 10% | $2.7 million | 15% | $50 million | 20% | $1 billion | Source: Make $1 million dollars in your lifetime on $1.00 per day. From Multiple Streams of Income, by Robert G. Allen. © March 17, 2000. http://www.e-bookdirectory.com/million.html Table 24 Table 24 shows the number of years needed for various principal amounts (one time deposit) to grow into $1million dollars. For all examples, a comparison is made, using interest rates of 5%, 10%, and 15%, compounded monthly. Principal Balance (One Time Investment) in $ | Number of Years Needed to Grow into $1 Million Dollars 5% Compounded Monthly | Number of Years Needed to Grow into $1 Million Dollars 10% Compounded Monthly | Number of Years Needed to Grow into $1 Million Dollars 15% Compounded Monthly | 1 | 276.8855 | 138.73 | 92.6779 | 2 | 262.9937 | 131.7696 | 88.0281 | 3 | 254.8675 | 127.6981 | 85.3081 | 4 | 249.1018 | 124.8093 | 83.3783 | 5 | 244.6297 | 122.5686 | 81.8814 | 6 | 240.9757 | 120.7378 | 80.6583 | 7 | 237.8862 | 119.1899 | 79.6242 | 8 | 235.21 | 117.849 | 78.7285 | 9 | 232.8495 | 116.6663 | 77.9383 | 10 | 230.7379 | 115.6083 | 77.2315 | 100 | 184.5903 | 92.4866 | 61.7852 | 1,000 | 138.4427 | 69.365 | 46.3389 | 10,000 | 92.2952 | 46.2433 | 30.8926 | 20,000 | 78.4033 | 39.283 | 26.2428 | 50,000 | 60.0394 | 30.082 | 20.0961 | 100,000 | 46.1476 | 23.1217 | 15.4463 | Note: All calculations were done using the online calculator presented by 1728 Software Systems’ Compound Interest Calculator. http://www.1728.com/compint.htm Suggested Reading: The Power of Compound Interest. April 20, 2006. freemoneyfinance Grow Your Net Worth. http://www.freemoneyfinance.com/2006/04/the_power_of_co.html POC ALSO WORKS REVERSE WAY: PAYING OFF HOME MORTGAGE EARLY Mortgage payments such as home, car etc. can be paid early by utilizing POC (it may not be a good idea though). Home mortgage payments are typically made monthly. If a person has a 30-year mortgage, 360 payments (30 years x 12 months = 360 payments) must be made to pay the mortgage in full. One way to reduce the number of years on the mortgage, and save money, is to make biweekly payments. Twenty-six biweekly payments are equal to 13 full-sized payments. By making 13 payments each year, instead of 12 payments, the mortgage will be paid off a few years earlier. Extra payments can also be made in other ways, as long as the lender agrees to the terms. For example, pay an extra 1/12 with each month’s payment or pay one extra payment before the end of the year. In addition to shaving time off the length of the mortgage, an extra payment made before December 31st each year is eligible for a tax deduction on the extra interest payment. Depending on the individual’s tax bracket and the amount of the monthly mortgage interest, the savings could be substantial. The tax refund money received could be invested in a Roth IRA or other pension fund. The money would grow tax free and, in the case of the Roth IRA, remain tax free on withdrawal. Still, another option is to make a payment of several thousand dollars on the home mortgage after 10, 15, or 20 years. Extra payments will greatly reduce the number of remaining mortgage payments. The ability to save money by making extra or early mortgage payments, and then investing the savings in a tax free fund, is one of the many benefits of home ownership. Table 29 below is an example of the financial rewards that an individual would reap over time by investing the hypothetical annual tax refund received for making an extra mortgage payment at the end of the year. Table 25 Table 25 shows the difference in the end values of both a $300 and $400 hypothetical tax refund deposited annually for 40 years. In both examples, the beginning balance is $300 and $400, respectively, and the interest rate is 10%, compounded monthly, starting at the beginning of the year. Beginning Balance in $ | Annual Deposit in $ | 10-Year End Value in $ at 10% | 15-Year End Value in $ at 10% | 20-Year End Value in $ at 10% | 30-Year End Value in $ at 10% | 40-Year End Value in $ at 10% | 300 | 300 | 5,702.74 | 11,231.56 | 20,328.18 | 59,919.85 | 167,096.15 | 400 | 400 | 7,603.65 | 14,975.41 | 27,104.23 | 79,893.11 | 222,794.80 | Sample Mortgage Repayment Methods Straight method: Loan amount: $100,000.00 Term of the loan: 30 Years Interest rate: 7.000%, compounded monthly Monthly mortgage payment: $665.30 First monthly payment: January 1, 2007 Last monthly payment: December 1, 2036 Extra payment method: Loan amount: $100,000.00 Term of the loan: 30 Years Interest rate: 7.000%, compounded monthly Monthly mortgage payment: $665.30 Monthly prepayment: $55.44, starting June 2007 (665.30 divided by 12 months = 55.44) First monthly payment: January 1, 2007 Last monthly payment: November 1, 2030 Table 26 Table 26 shows how the extra payment method will reduce a 30-year mortgage to 23 years. Method | Monthly Mortgage in $ | Extra Payment in $ Beginning June 2007 | First Payment | Last Payment | Straight | 665.30 | 0 | Jan. 1, 2007 | Dec. 1, 2036 | Extra-Payment | 665.30 | 55.44 | Jan. 1, 2007 | Nov. 1, 2030 | Note: Using the extra payment method, the mortgage will be paid off approximately 6 years earlier than the straight method. (Year 2036 – Year 2030 = 6 years). Table 27 Table 27 shows the value of $665.30/year investment (equal to one extra mortgage payment per year) at the end of 30 years (in 5-year increments) at various interest rates (6% to 10%), compounded monthly. Year | Annual Deposit in $ | 6% | 7% | 8% | 9% | 10% | 5 | 665.30 | 4,660.33 | 4,786.63 | 4,917.66 | 5,053.59 | 5,194.63 | 10 | 665.30 | 10,049.03 | 10,629.14 | 11,253.01 | 11,924.24 | 12,646.77 | 15 | 665.30 | 17,317.58 | 18,911.63 | 20,691.71 | 22,681.50 | 24,907.85 | 20 | 665.30 | 27,121.76 | 30,653.09 | 34,753.92 | 39,523.94 | 45,081.12 | 25 | 665.30 | 40,346.13 | 47,298.08 | 55,704.43 | 65,893.82 | 78,272.37 | 30 | 665.30 | 58,183.83 | 70,894.45 | 86,917.47 | 107,180.64 | 132,882.23 | Note: Some lending institutions may charge a onetime or yearly set-up fee (e.g., $500.00) to accept an extra payment. Table 28 Table 28 shows the cumulative savings of a person who pays off a 30-year mortgage in 23 years, and then invests $665.30/month (the amount of the monthly mortgage payment) for seven years at various interest rates (6% to 10%), compounded monthly. Year | Monthly Deposit in $ | 6% | 7% | 8% | 9% | 10% | 7 | 665.30 | 70,251.89 | 72,936.16 | 75,751.54 | 78,705.08 | 81,804.18 | Money Merge Account (MMA) The MMA (also called Australian Mortgage) is a loan program which utilizes costly proprietary software* to help homeowners pay off their mortgage earlier; possibly, saving some homeowners $100,000 or more over the life of the loan. According to the Web article, Is a Money Merge Account a Good Way to Pay Off Your Mortgage? MMAs work as follows: The homeowner sets up a home-equity line of credit (HELOC), borrowing against the value of his property. Some large sum is withdrawn from the HELOC and used to pay down the primary mortgage. The homeowner does not deposit his paychecks, etc. into a traditional savings account [which typically earns 1% to 3%, compounded monthly or annually], but applies them to pay down the HELOC. From time-to-time, another large chunk of money is taken out of the HELOC and applied to the primary mortgage. In case of emergency, the homeowner takes more money out of the HELOC.Though the HELOC will likely have a higher interest rate than the primary mortgage [which typically carries an interest rate of 5 to 8%, compounded monthly], it’s actually cheaper to maintain because of the way the interest is calculated. [The loan is reduced daily because MMAs utilize the daily compounding method.] Source: Is a Money Merge Account a Good Way to Pay Off Your Mortgage? Monday, 1st October 2007 (by J.D.) Get Rich Slowly: personal finance that makes cents. http://www.getrichslowly.org/blog/2007/10/01/is-a-money-merge-account-a-good-way-to-pay-off-your-mortgage/ *According to various MMA options online, the average cost of proprietary (non-free) software is $3,000. The following example from the Web article, Money Merge Accounts: Are They A Good Deal For Home Borrowers? Explains how a 30-year mortgage can be paid off early: Every time you receive a paycheck, the whole thing goes straight towards first paying off any balance in your money merge account, then the entire remainder of your check goes towards paying the interest, then the principal of your home loan. Let’s say you had a mortgage with $1,500 payments and you set up a money merge account. Each month, you received $3,500 in paychecks, but only spent $1,200 (and sometimes less). That means that automatically $2,300 (and sometimes more) goes towards that mortgage each month - an extra $800 [$2,300 - $1,500 = $800] towards principal every single month. This means a 30 year mortgage would be paid off in 13 years and two months. Source: Money Merge Accounts: Are They A Good Deal For Home Borrowers? March 3, 2007 @ 12:00 pm - Written by Trent. Categories: Debt, Housing. The Simple Dollar: financial talk for the rest of us. http://www.thesimpledollar.com/2007/03/03/money-merge-accounts-are-they-a-good-deal-for-home-borrowers/ Although a MMA may sound appealing, this type of early mortgage payoff program may not be right for everyone. Individuals who routinely spend more than they earn will end up paying more in interest over time with the HELOC; and, the upfront cost for proprietary software can be expensive ($3,000 on average). Anyone interested in setting up such an account would be wise to research the topic thoroughly before making a decision to do so. The Internet alone contains hundreds of thousands of Web sites on money merge accounts. To see a list of some of the advantages and the disadvantages of a MMA, go to Aston Cooper’s Web blog: Aston Cooper Hits Back! Saturday, August 25, 2007. Old Wikipedia for Money Merge Account. http://ashtoncooper.blogspot.com/2007/08/old-wikipedia-for-money-merge-account.html Interest-Only (IO) Mortgage Loans Unlike a traditional 15-year or 30-year mortgage (which requires a monthly payment of the principal and interest on the loan), an interest-only mortgage requires a monthly payment of the interest only for the term of the loan (usually 5 or 10 years). The rationale behind an IO loan is that the homeowner/investor will earn a higher rate of return than the mortgage interest rate on the loan* by investing the excess cash in stocks, savings, etc. If the investments are profitable, the IO loan holder will have the money to refinance or pay off the mortgage once the IO mortgage reaches maturity. Depending on the homeowner’s knowledge of investment and/or saving strategies, an interest-only mortgage program may or may not prove beneficial. For a list of some of the advantages and disadvantages of IO mortgage programs, go to the Web article, What are the benefits of interest only mortgages and why are they so popular?, posted on MORTGAGENewsDaily. As stated in the aforementioned article , the following information offers perspective homeowners some words of caution: An interest-only loan is not a magic pill and misguided home-buyers shouldn't rely on unprecedented, unbridled home appreciation or increased wage earnings, commissions, or investment equity to satisfy the balloon principal after the interest-only mortgage reaches maturity. Source: MORTGAGENewsDaily. Tuesday, August 19, 2008. What are the benefits of interest only mortgages and why are they so popular? http://www.mortgagenewsdaily.com/wiki/Interest_Only_Mortgage_Loans.asp In general, individuals in very high tax brackets would derive more benefit through tax savings from taking out an IO loan than those in low tax brackets. Regardless of income level, study the pros and cons of all mortgage payoff programs available (or seek the advice of a certified financial planner) before making a decision. *Example: If the home mortgage interest is 6%, that is more or less 6% saving from the principal payment every month, then one needs to get a rate of return in the non-payment principal deferred investment account, or interest only method, better than 6% + 3% inflation rate in tax deferred investment, such as some kind of pension fund. If invested in a yearly taxable account, then the rate of return has to be better than 6% + 3% inflation rate + taxable % which is usually 15 to 30% of the profit from investment. This means that the rate of return in this situation has to be at least 11% or greater to be meaningful. The calculations may not be completely accurate, but this is the concept. Suggested Readings: The Federal Reserve Board. Last update: August 27, 2007. Interest-Only Mortgage Payments and Payment-Option ARMs. Are They for You? http://www.federalreserve.gov/pubs/mortgage_interestonly/howstuffworks. How Interest-only Loans Work by Charles W. Bryant. http://money.howstuffworks.com/personal-finance/interest-only-loan .htm/printable Interest-Only Mortgage Tutorial. Copyright Jack Guttentag 2006. http://www.mtgprofessor.com/tutorials2/interest_only.htm Additional Sources: http://www.google.com/search?client=firefox-a&rls=org.mozilla%3AenUS%3Aofficial&channel=s&hl=en&q=benefits+of+interest+only+mortgage&btnG=Google+Search Pros & Cons of Early Mortgage Payoff There are pros and cons to paying off a mortgage early according to the National Endowment for Financial Education (2005) article, Should You Pay Off Your Mortgage Early? Some advantages to paying off your mortgage early are as follows: Providing Emotional Security…from the anxiety of owing money… Investing for the Future...you could be earning interest with your [mortgage payment] funds. Meeting Retirement Needs…[you] free up your money for other things… Reducing Loan Stresses…you remove the risk of "owing more than you own"…[and] you avoid being hit by climbing rates if the interest on your loan is variable… Some drawbacks to paying off your mortgage early are below: Missing Investing Opportunities… you can lose the opportunity to invest and build up a secure retirement nest egg… Losing Tax Savings…you’ll lose the interest deduction… To see the complete checklists of pros and cons, go to the AARP Web site: AARP.org Retirement Planning. Should You Pay Off Your Mortgage Early? By the National Endowment for Financial Education. 2005. http://www.aarp.org/money/financial_planning/sessionseven/payoffmortgage.html Another drawback to paying off the mortgage early is that the property could be lost through a lawsuit. When the homeowner has little equity* in the property, there is less risk of losing the asset. To learn about more ways to protect "your family castle," read the article, Don’t Let a Lawsuit Kick You Out of Your Home: How To Protect Your Family Castle, by Glenn M. Terrones, Esq. www.terroneslaw.com/Docs/AssetProtect.pdf (View using Foxfire in html) Early payoff of the mortgage may leave a homeowner short of funds in the event of an emergency; therefore, the homeowner may want to have a line of credit available to cover any unforeseen problems. A Home Equity Line of Credit (HELOC) or a home equity loan allows the homeowner to borrow money, using the home’s equity as collateral. Perspective borrowers need to understand the difference between a HELOC and a home equity loan beforehand. "A HELOC is a line of revolving credit with an adjustable interest rate, whereas a home equity loan is a one time lump-sum loan, often with a fixed interest rate." http://en.wikipedia.org/wiki/Home_equity_loan To see an example of how home equity is calculated and an example of how a HELOC works , go to Bankrate.com. Home Equity Basics. Ch 1: What equity debt is. Updated: April 1, 2006. http://www.bankrate.com/brm/green/loan/basics1-1a.asp Avoid the temptation to use the HELOC for purposes other than emergencies, including making investments in the hope of getting a higher rate of return (unless the investments are without risk and/or can be divested at will). Misuse of a line of revolving credit may create more debt. *Equity is the difference between how much the home is worth (fair market value) and how much is owed on the mortgage. As the mortgage is paid down or as the property appreciates in value, the equity increases. PROCRASTINATORS "I’m too young." "It’s too early." "I don’t have any money to invest." By now, the reader should realize that the above statements are poor excuses for not investing early in life. Time is money and money is power. Although money does not guarantee happiness, money provides options. Be aware that once the window of opportunity passes, the ability to make up for lost time is very difficult. Table 29 Table 29 shows the interest earned on investments of just $1, $5, $10, $15, $20, and $25 monthly. In each example, the time period is 5 to 70 years (in 5-year increments), and the interest rate is 10%, compounded monthly. Year | $1 Monthly Deposit at 10% | $5 Monthly Deposit at 10% | $10 Monthly Deposit at 10% | $15 Monthly Deposit at 10% | $20 Monthly Deposit at 10% | $25 Monthly Deposit at 10% | 5 | 79.08 | 395.41 | 790.82 | 1,186.24 | 1,581.65 | 1,977.06 | 10 | 207.55 | 1,037.76 | 2,075.52 | 3,113.28 | 4,151.04 | 5,188.80 | 15 | 418.92 | 2,094.62 | 4,189.24 | 6,283.86 | 8,378.49 | 10,473.11 | 20 | 766.70 | 3,833.48 | 7,666.97 | 11,500.45 | 15,333.94 | 19,167.42 | 25 | 1,338.89 | 6,694.45 | 13,388.90 | 20,083.36 | 26,777.81 | 33,472.26 | 30 | 2,280.33 | 11,401.63 | 22,803.25 | 34,204.88 | 45,606.51 | 57,008.13 | 35 | 3,829.28 | 19,146.38 | 38,292.77 | 57,439.15 | 76,585.53 | 95,731.92 | 40 | 6,377.78 | 31,888.90 | 63,777.80 | 95,666.70 | 127,555.60 | 159,444.51 | 45 | 10,570.86 | 52,854.28 | 105,708.56 | 158,562.84 | 211,417.12 | 264,271.40 | 50 | 17,469.76 | 87,348.80 | 174,697.61 | 262,046.41 | 349,395.21 | 436,744.02 | 55 | 28,820.59 | 144,102.95 | 288,205.91 | 432,308.86 | 576,411.80 | 720,514.77 | 60 | 47,496.21 | 237,481.05 | 474,962.13 | 712,443.18 | 949,924.23 | 1,187,405.31 | 65 | 78,223.38 | 391,116.88 | 782,233.80 | 1,173,350.68 | 1,564,467.56 | 1,955,584.49 | 70 | 128,779.06 | 643,895.28 | 1,287,790.63 | 1,931,685.92 | 2,575,581.20 | 3,219,476.56 | Table 30 Table 30 shows the interest earned on investments of just $1, $2, $3, $4, $5, and $6 weekly. In each example, the time period is 5 to 70 years (in 5-year increments), and the interest rate is 10%, compounded monthly. Year | $1 Weekly Deposit at 10% | $2 Weekly Deposit at 10% | $3 Weekly Deposit at 10% | $4 Weekly Deposit at 10% | $5 Weekly Deposit at 10% | $6 Weekly Deposit at 10% | 5 | 340.22 | 680.45 | 1,020.67 | 1,360.89 | 1,701.11 | 2,041.34 | 10 | 900.31 | 1,800.62 | 2,700.94 | 3,601.25 | 4,501.56 | 5,401.87 | 15 | 1,825.08 | 3,650.15 | 5,475.23 | 7,300.31 | 9,125.38 | 10,950.46 | 20 | 3,351.95 | 6,703.91 | 10,055.86 | 13,407.81 | 16,759.77 | 20,111.72 | 25 | 5,860.71 | 11,721.41 | 17,582.12 | 23,442.83 | 29,303.54 | 35,164.24 | 30 | 10,015.18 | 20,030.36 | 30,045.54 | 40,060.71 | 50,075.89 | 60,091.07 | 35 | 16,874.62 | 33,749.24 | 50,623.87 | 67,498.49 | 84,373.11 | 101,247.73 | 40 | 28,200.24 | 56,400.48 | 84,600.72 | 112,800.96 | 141,001.21 | 169,201.45 | 45 | 46,899.96 | 93,799.92 | 140,699.88 | 187,599.84 | 234,499.80 | 281,399.76 | 50 | 77,775.04 | 155,550.09 | 233,325.13 | 311,100.17 | 388,875.22 | 466,650.26 | 55 | 128,752.86 | 257,505.73 | 386,258.58 | 515,011.44 | 643,764.31 | 772,517.17 | 60 | 212,922.27 | 425,844.57 | 638,766.84 | 851,689.12 | 1,064,611.41 | 1,277,533.69 | 65 | 351,894.30 | 703,788.65 | 1,055,682.96 | 1,407,577.26 | 1,759,471.61 | 2,111,365.92 | 70 | 581,350.88 | 1,162,701.83 | 1,744,052.70 | 2,325,403.58 | 2,906,754.53 | 3,488,105.40 | Table 31 Table 31 shows the difference in interest earned on $1 invested weekly and $1 invested monthly vs. $25 invested weekly and $25 invested monthly. In both the weekly and monthly examples, the beginning balance is $1 and $25, respectively, the time period is 5 to 70 years (in 5-year increments), and the interest rate is 10%, compounded monthly. Year | $1 Weekly Deposit at 10% | $1 Monthly Deposit at 10% | $25 Weekly Deposit at 10% | $25 Monthly Deposit at 10% | 5 | 340.22 | 79.08 | 8,505.56 | 1,977.06 | 10 | 900.31 | 207.55 | 22,507.81 | 5,188.80 | 15 | 1,825.08 | 418.92 | 45,626.91 | 10,473.11 | 20 | 3,351.95 | 766.70 | 83,798.83 | 19,167.42 | 25 | 5,860.71 | 1,338.89 | 146,517.68 | 33,472.26 | 30 | 10,015.18 | 2,280.33 | 250,379.46 | 57,008.13 | 35 | 16,874.62 | 3,829.28 | 421,865.55 | 95,731.92 | 40 | 28,200.24 | 6,377.78 | 705,006.03 | 159,444.51 | 45 | 46,899.96 | 10,570.86 | 1,172,498.98 | 264,271.40 | 50 | 77,775.04 | 17,469.76 | 1,944,376.08 | 436,744.02 | 55 | 128,752.86 | 28,820.59 | 3,218,821.53 | 720,514.77 | 60 | 212,922.27 | 47,496.21 | 3,218,821.53 | 1,187,405.3 | 65 | 351,894.30 | 78,223.38 | 8,797,357.97 | 1,955,584.5 | 70 | 581,350.88 | 128,779.06 | 14,533,772.5 | 3,219,476.6 | Note: On retirement, 46% of the U.S. population has only $25,000 in a pension fund. Accordingly, a person is never too young, the time is never too early, and the amount of money is never too small to start investing for retirement. A person who waits to invest will need to invest more money to catch up to a person who starts investing early. In many cases, the late investor will never be able to catch up. COLLEGE & UNIVERSITY ENDOWMENTS College and university endowments are funds that produce income for the institutions. When a gift of money, income producing property, or other asset is donated to the fund, the endowed asset typically remains intact and only the income earned on the asset is spent. Endowment funds are generally restricted and can only be used for specific purposes, such as to provide professorships, scholarships, and fellowships, and to maintain libraries, etc. Endowments in excess of $1 billion dollars have come under scrutiny in recent years. The following criticism on mega endowments can be found on Wikipedia, the free encyclopedia, Web site: Officials in charge of the endowments of some universities have been criticized for "hoarding" and reinvesting too much of the endowment’s income. Given a historical endowment performance of 10–11%, and a payout rate of 5%, around half of the endowment’s income is reinvested. Roughly 3% of the reinvestment is used to keep pace with inflation, leaving an inflation-adjusted 2% annual growth of the endowment. [To read about two arguments against inflation adjusted endowment growth, go to the Web site below.] Source: http://en.wikipedia.org/wiki/College_and_university_endowments_in_the_United_States Suggested Readings: http://www.cnn.com/2008/US/05/14/beck.collegeendowment/index.html CNN.com/US. Commentary: Tax-free hypocrisy from higher education. By Glen Beck. http://www.insidehighered.com/views/2008/06/19/fryshman insidehighered.com June 19. Today, Harvard. Tomorrow…? By Bernard Fryshman. In his January 24, 2008, Boston Globe article, Harvard’s endowment surpasses $34 billion, s taff writer Peter Schworm reported the following: As endowments soar, the wealthiest colleges and universities are facing growing pressure from Congress to spend more of their savings [at least 5 percent] to limit tuition increases and expand financial aid grants. Colleges have spent proportionately less of their endowment for each of the past four years and now spend 4.6 percent on average. Institutions with more than $1 billion spent 4.4 percent. Source: http://www.boston.com/news/local/articles/2008/01/24/harvards_endowment_surpasses_ 34_billion/ Boston.com Harvard’s endowment surpasses $34 billion. Peter Schworm. Globe Staff/January 24, 2008. The Boston Globe. "...Students from families that earn less than $60,000 per year don't have to pay any costs to attend, and those from families that earn between $60,000 and $180,000 per year will pay no more than 10 percent of their annual income. For most Harvard students (about 60 percent), these policies add up to a big discount off the elite university's $52,000-per-year sticker price." Schworm further reported that "In December [2007], Harvard announced it would spend $120 million on financial aid next year [2008], a $22 million increase." Since then, a number of elite universities have increased their financial aid to exceptionally smart students from less affluent backgrounds. Besides being one of the top ranked colleges in the nation, Harvard is the best-funded one. Beside, according to Andrew Farrell’s article, The Billionaire Universities, as provided by Forbes on the Yahoo! Finance Web site (Friday, May 30, 2008), the main reason perspective students hope to receive an acceptance letter is because "Harvard students are more likely to become billionaires than graduates of any other college…Of the 469 Americans on Forbes most recent list of the world’s billionaires, 50 received at least one degree from Harvard…" Source: Yahoo! Finance. The Billionaire Universities. By Andrew Farrell. Friday, May 30, 2008. Provided by Forbes.com. http://finance.yahoo.com/college-education/article/105175/%60 Harvard’s endowment is a good example of how "the rich get richer" through the power of compounding. Donations from generous alumni and other sources have allowed the university to create a huge investment portfolio worth billions of dollars. Most likely, Harvard’s recent decision to offer considerable financial assistance to deserving less affluent students will reap rewards by creating a new wave of loyal alumni. Suggested Reading: The Motley Fool. Wisdom From the World’s Second-Best Investor. By John Reeves. November 26, 2007 http://www.fool.com/investing/mutual-funds/2007/11/26/wisdom-from-the-worlds-second-best investor.aspx There are more stories like this. . Table 32 Table 32 shows the market value of the top 50 college and university endowment assets for Fiscal Year 2007, including the percent change in endowment funds between 2006 and 2007. 2007 NACUBO Endowment Study© 2008 National Association of College and University Business Officers. All Institutions Listed by Fiscal Year 2007 Market Value of Endowment Assets with Percent Change Between 2006 and 2007 Endowment Assets. NOTE: This percentage does NOT represent the rate of return for the institution’s investments. Rather, the percent change in the market value of an endowment from fiscal year end 2006 to fiscal year end 2007 reflects the net impact of: 1) withdrawals to fund institutional operating and capital expenses; 2) the payment of endowment management and investment fees; 3) additions from donor gifts; and 4) investment gains or losses. Rank | Institution | State | 2007 Endowment Funds ($000) [Billions of $] | 2006 Endowment Funds ($000) [Billions of $] | *Percent Change in Endowment (2006 - 2007) | 1 | Harvard University | MA | 34,634,906 | 28,915,706 | 19.8% | 2 | Yale University | CT | 22,530,200 | 18,030,600 | 25.0% | 3 | Stanford University | CA | 17,164,836 | 14,084,676 | 21.9% | 4 | Princeton University | NJ | 15,787,200 | 13,044,900 | 21.0% | 5 | University of Texas System | TX | 15,613,672 | 13,234,848 | 18.0% | 6 | Massachusetts Institute of Technology | MA | 9,980,410 | 8,368,066 | 19.3% | 7 | Columbia University | NY | 7,149,803 | 5,937,814 | 20.4% | 8 | University of Michigan | MI | 7,089,830 | 5,652,262 | 25.4% | 9 | University of Pennsylvania | PA | 6,635,187 | 5,313,268 | 24.9% | 10 | The Texas A&M University System and Foundations | TX | 6,590,300 | 5,642,978 | 16.8% | 11 | Northwestern University | IL | 6,503,292 | 5,140,668 | 26.5% | 12 | University of California | CA | 6,439,436 | 5,541,930 | 16.2% | 13 | University of Chicago | IL | 6,204,189 | 4,867,003 | 27.5% | 14 | University of Notre Dame | IN | 5,976,973 | 4,436,624 | 34.7% | 15 | Duke University | NC | 5,910,280 | 4,497,718 | 31.4% | 16 | Washington University | MO | 5,567,843 | 4,684,737 | 18.9% | 17 | Emory University | GA | 5,561,743 | 4,870,019 | 14.2% | 18 | Cornell University | NY | 5,424,733 | 4,321,199 | 25.5% | 19 | Rice University | TX | 4,669,544 | 3,986,664 | 17.1% | 20 | University of Virginia | VA | 4,370,209 | 3,618,172 | 20.8% | 21 | Dartmouth College | NH | 3,760,234 | 3,092,094 | 21.6% | 22 | University of Southern California | CA | 3,715,272 | 3,065,935 | 21.2% | 23 | Vanderbilt University | TN | 3,487,500 | 2,946,392 | 18.4% | 24 | University of Minnesota | MN | 2,804,466 | 2,224,308 | 26.1% | 25 | Johns Hopkins University | MD | 2,800,377 | 2,350,749 | 19.1% | 26 | Brown University | RI | 2,780,798 | 2,290,646 | 21.4% | 27 | Ohio State University and Foundation | OH | 2,338,103 | 1,996,839 | 17.1% | 28 | University of Pittsburgh | PA | 2,254,379 | 1,802,859 | 25.0% | 29 | University of Washington | WA | 2,184,374 | 1,794,370 | 21.7% | 30 | University of North Carolina at Chapel Hill and Foundations | NC | 2,164,444 | 1,638,601 | 32.1% | 31 | New York University | NY | 2,161,800 | 1,774,700 | 21.8% | 32 | The Rockefeller University | NY | 2,145,203 | 1,771,954 | 21.1% | 33 | Williams College | MA | 1,892,055 | 1,462,131 | 29.4% | 34 | California Institute of Technology | CA | 1,860,052 | 1,580,922 | 17.7% | 35 | Case Western Reserve University | OH | 1,841,234 | 1,598,566 | 15.2% | 36 | Purdue University | IN | 1,786,592 | 1,493,554 | 19.6% | 37 | University of Toronto | ON | 1,763,764 | 1,414,513 | 24.7% | 38 | Pomona College | CA | 1,760,902 | 1,457,213 | 20.8% | 39 | University of Rochester | NY | 1,726,318 | 1,491,275 | 15.8% | 40 | Grinnell College | IA | 1,718,313 | 1,471,804 | 16.7% | 41 | Boston College | MA | 1,670,092 | 1,447,887 | 15.3% | 42 | Amherst College | MA | 1,662,377 | 1,337,158 | 24.3% | 43 | Wellesley College | MA | 1,656,565 | 1,412,410 | 17.3% | 44 | University of Richmond | VA | 1,654,988 | 1,380,439 | 19.9% | 45 | University of Wisconsin Foundation | WI | 1,645,250 | 1,425,750 | 15.4% | 46 | Pennsylvania State University | PA | 1,590,000 | 1,326,390 | 19.9% | 47 | Indiana University and Foundation | IN | 1,556,853 | 1,276,160 | 22.0% | 48 | University of Illinois | IL | 1,515,387 | 1,252,290 | 21.0% | 49 | Tufts University | MA | 1,452,058 | 1,148,868 | 26.4% | 50 | Swarthmore College | PA | 1,441,232 | 1,245,281 | 15.7% | Source: http://www.nacubo.org/x2376.xml 2007 NACUBO Endowment Study Results, Table: All Institutions Listed by FY 2007 Market Value of Endowment Assets With Percent Change Between 2006 and 2007 Endowment Assets. HOWEVER 2008 AND 2009 COLLEGE ENDOWMENT FUNDS HAD DIFFERENT RATE OF RETURNS. ALL FUNDS SUSTAINED HUGE LOSSES (40%+/-) TILL MARCH 2009 AND AFTER MARCH,2009 ALL FUNDS REGAINED CONSIDERABLY. Table 33 Table 33 shows only Line 1 from Table 36 above to emphasize Harvard’s staggering endowment stockpile and its nearly 20% increase in one year. Rank | Institution | State | 2007 Endowment Funds | 2006 Endowment Funds | Percent Change in Endowment (2006 - 2007) | 1 | Harvard University | MA | 34,634,906,000 | 28,915,706,000 | 19.8% | Harvard’s endowment is a classic example of how the power of compounding may create untold wealth. In his article, Commentary: Tax-free hypocrisy from higher education, Glen Beck (host on CNN Headline News nightly at 7 and 9 ET and host of a conservative national radio talk show) writes that "…if you project Harvard's endowment out using their historical rate of return they would have over half a TRILLION dollars in 20 years." Source: http://www.cnn.com/2008/US/05/14/beck.collegeendowment/index.html CNN.com/US. Commentary: Tax-free hypocrisy from higher education. By Glen Beck. According to Jessica Shedd, director of research and policy analysis for the NACUBO (as reported in The Boston Globe article, Harvard’s endowment surpasses $34 billion, by Peter Schworm), "It was a very good year for endowments." Some of Shedd’s comments on the results of the NACUBO annual report is as follows: Among colleges with endowments greater than $1 billion, the median one-year return was 21 percent. Nationally, the median return was 17.2 percent, the highest since 1998…Over the past decade, college endowments showed an 8.6 percent rate of return, an important threshold in maintaining financial stability…[Shedd] credited a strong stock market for fueling the endowment increases, pointing out that the S&P 500 index rose by more than 20 percent over the past fiscal year, which ended in June. Source: http://www.boston.com/news/local/articles/2008/01/24/harvards_endowment_surpasses_34_billion/ Boston.com Harvard’s endowment surpasses $34 billion. Peter Schworm. Globe Staff/January 24, 2008. The Boston Globe. Table 34 Table 34 shows that, by applying the Rule of 72, the value of Harvard’s endowment will top $1 trillion dollars in 86.4 years at 5 percent interest, compounded annually (Rule of 72: Divide 5 into 72 = 14.4). Realistically, the fund should top $1 trillion in less time because the Rule of 72 does not take into account any reinvested funds and the likelihood of future endowed assets and the resulting income and interest earned on those assets. $ Value of Endowment Beginning at the end of 2007 | Number of Years Required to Double the Value | 34,634,906,000 | 14.4 | 69,269,812,000 | 28.8 | 138,539,624,000 | 43.2 | 277,079,248,000 | 57.6 | 554,158,496,000 | 72 | 1,108,316,992,000 | 86.4 | CREATING WEALTH FOR CHILDREN, INVEST AND TEACHING THEM POC Ideally, parents would want to start the investment process for their children before the children are born. Once the children are old enough to understand the meaning of making investments, parents/schools would then teach their children about the concept of POC. Parents may reinforce the learning process by giving their children "salaried" jobs for performing various chores around the house, and then instruct the children on how to contribute a portion of their earning to an investment portfolio. Generally, no taxes are owed on the income paid to the children because the amount of money is usually small. Under some circumstances, the income paid may be tax deductible for the parents, such as having a home office. Parents may wish to consult with an accountant about the requirements for taking a home office deduction. Parents may decide to gift stock to their children through a Dividend Reinvestment Plan (DRIP or DRR), with the option for the children to buy more stock. A DRIP insures that all the dividends will be reinvested, thus increasing the number of the stock (in addition to any future stock appreciation). Any money earned by the children e.g. doing some chore or working in family business or delivering newspapers or anything else can be invested in the Roth IRA and other tax free investments. This money in the Roth IRA or in other investments can be used for future college education. However, one should consider this as retirement fund (discussed below) for the child rather than college fund. Use college expenses from other sources. Child Tax Returns: A minor child, whose income totals more than $900, usually must file a tax return. The first $900 of unearned income child does pay no tax. A tax is applied on next $900 at his or her own tax rate. KIDDIE TAX: If a child under age 18, receives an annual unearned income of more than $1,800 will be liable for tax on amounts in excess of $1,800 at the parent taxpayer’s maximum marginal tax rate. Please seek advice from your accountant. What is the Retirement InCome – for Everyone Trust®? http://www.ricetrust.com/q.asp?q=1 The Retirement InCome - for Everyone Trust® (called the RIC-E Trust® for short, pronounced RICKY) is a way for parents, grandparents and others to help ensure that a child they love can enjoy a financially secure retirement. The idea is to let you set aside money until the child's retirement and have that money grow without taxes, even for decades." RIC-E Trust (RICKY) is the brain child of the financial advisor Ric Edelman. He established the trust in 1998. There are few criteria need to be met. The child will need a Social Security number and a US address. The trust is recognized in every state of US. The trust will accept additional contribution in amount of $500 or more from any person at any time. The trust is irrevocable and once money is contributed, the money can not be taken back or undo any aspect of the trust. The earliest age the money can be withdrawn from the trust by the child is age 591/2 unless becomes disabled. The trustee can then distribute the money from the trust because of disability and for no other reason/s. When the child reaches the retirement age, the assets can be transferred from the trust to him or her without any restriction. The tax rate will be the tax rate at the time of distribution. Money will be taxed as the money is withdrawn partially or fully. The money can be left in the trust to continue to defer tax. $5000 is the minimum amount required to establish trust. Anyone can establish the trust for any child including adult children of any age, those in college or newly married. Investment results vary, of course, but one thing is clear: If one pays taxes on each year's earnings, one'll end up with much less than if one can avoid taxes annually. Tax deferral and as well as reinvestment of all dividends and interests are powerful tools that can help the assets in the trust to grow faster than they would in a comparable investment fund that is annually taxed and or dividends are not reinvested. Ric Edelman will be the financial advisor for the trust unless some one else is selected. The Alternatives to the RICKY trust can be found at the site below. http://www.ricetrust.com/alternatives.asp One should consult an attorney or tax advisor before establish a RICKY Trust. Detail information can be found at the reference below including how to set the trust. Reference: Introducing the Retirement InCome for Everyone Trust®? http://www.ricetrust.com/q.asp " For administrative questions you might have regarding the RIC-E Trust®, contact Edelman Business Services LLC at 888-PLAN-RIC." Edelman Business Services LLC at 888-PLAN-RIC." | |