Notes from 'The Wealthy Barber' by David Chilton

Chapter 3 - The Wealthy Barber

The first lesson: “You can do this.”

Financial planning is easy to understand. Executing properly can be challenging. You have to win the fight against human nature. Human nature can be at least tamed, if not beaten using some techniques.

Chapter 4 - Two Rules

Golden rule taught to Roy by Mr. White: Invest at least 10 per cent of all you make for long-term growth through compounding.

Example to illustrate the power of long-term growth through compounding: if a person saves and invests $580 a month for the next 30 years (360 months) and averages an 8 percent return, the future value of this investment is $816,959.34.

\[A = P\left(1 + \frac{r}{m}\right)^{mt} + PMT \cdot \frac{\left(1 + \frac{r}{m}\right)^{mt} - 1}{\frac{r}{m}}\]

Where:

$A$ is the final amount (future value).
$P$ is the initial investment (your lump-sum starting amount).
$PMT$ is the regular addition each period (e.g. each month).
$r$ is the annual interest rate in decimal form (so 5% → $0.05$).
$m$ is how many times per year interest is compounded (12 for monthly, 4 for quarterly, 2 for semi-annual, 1 for annual).
$t$ is time in years.

The first term $P\left(1 + \frac{r}{m}\right)^{mt}$ grows your starting lump sum, and the second term adds the effect of all the equal, regular contributions being compounded over time.