Question

If someone gave you $10,000, how long would it take you to turn that $10,000 into $1,000,000?

What is your plan?

Also, make sure that somewhere within your response to include the use of Future Value of Money formula as shown within the Chapter. A cash flow diagram would be helpful as well.

For some reason i could only think of Roth IRAs or Mutual Funds is there other ways excluding stock market that have good return but not as high risk like stocks?

Answer 1

Solution:-

The formula for compounded annual growth rate is as follows:

Future value= Principal*(1+r)ⁿ

where,

Future value= $1,000,000

Principal= $10,000

r= rate of return per compounding period

n= number of compounding periods

The world of finance is very simple- Higher the risk, higher the return. There is no way around this rule. If we have $10,000 and we want to convert it into $1,000,000 than there are innumerable ways to do it. Even if the money is kept in a savings account offering just 0.5% per annum will grow $10,000 into $1,000,000 if the money is kept for the long enough time. Thus, it comes down to the matter of time required to grow the money. The time required to do so within various alternatives differs based on the risk of different alternatives. Higher the risk of an alternative, lesser the amount of time it may take to reach the target of $1,000,000 (offcourse alongwith the higher risk of losing that $10,000) and vice-versa. The various alternatives that a person can choose to grow his money are as follows (Yop to bottom in the sequence of underlying risk):

• Treasury bills/Bank deposits
• Investment in farms, lands, etc
• Investment in real estate / Shares of real estatement investment trusts
• Investment in precious metals such as gold, silver, etc
• Stocks/Mutual funds
• Investing as an angel investor in startups, small businesses
• Becoming an entreprenur and starting a business
• Betting on lottery, horse races, casinos, etc

Thus, as we can see there are various options with varied amount of risks and thus different time required to grow the money to the desired levels. The time required to grow funds in less risky assets such as tresury bills, farms, real estate, is very high as compared to risk assets such as stocks.

If you don't want to consider stock market and yet want to grow money at a fast pace, the best option is to become an entreprenur and start a small business with $10,000. Conventionally speaking, it is surely more risky than stock markets as the stocks are bigger companies with much lesser risks as compared to a small business. However, risk should not always be considered in mathematical terms. An entrepreneur can reduce the risk of his investments by bringing his understanding and expertise of the business he has invested in. Thus, a good way to grow $10,000 faster without taking very high risks is to find a small business that you understand very well and have natural skills for. For e.g.: If you are a great chef, it is highly likely that a food truck started by you would do very well. Thus, finding a small business that you have a natural skill and understanding for is a great way to increase small sums of money quickly and become a millionaire.

Other than that, as I said before, higher the risk and higher the return. There is no way to bypass that. Like the great Warren Buffett has said- "The real risk is not knowing what you are doing". So, if you have a very good understanding of a business and you invest in that, you are in effect giving yourself a shot at growing your money faster and hedging the high risk through your knowledge and expertise.