Start Saving Early, Let Compound Interest Work For You
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Start Saving Early, Let Compound Interest Work For You
I am sure most people have have heard of this mantra, many a times. But let me reiterate the benefit of compounding for those that are new to this topic.
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What is Compounding?
Basically, compounding works by paying interest on top of your interest that you earn previously. As such, with each interest given to you, this interest would help you to earn interest in the next year, together with the savings that you put in, assuming that you do not touch the interest.
For example, if you put away an investment of $1000 for this year at an interest rate/return of 10 percent per annum. You would at the end of first year, earn $100 as interest giving you a total of $1100. At the end of second year, your $100 will earn $10 in addition to the $100 from the initial $1000 you put in at the start of first year, giving you a total of ($1100 + $110)=$1210.
Benefit of Starting Early
Let me show you the power of starting early. Two scenarios. Scenario A, you put in $100 per year for the next 15 years. Scenario B, you put in $100 per year for the next 10 years. For Scenario A, you would have $3495 at the end of 15 years. For Scenario B, you would have $1754 at the end of 10 years. The difference in 5 years has caused a difference of $1740 between the two scenarios.
A general rule of thumb to see how long it takes to double your investment is taking the number 72 divide by the rate of returns of investment. For example, if you put in an investment of $1000 into an investment with return of 6% per annum. Dividing 72 by 6 you would get 12. That means your investment of $1000 would become $2000 at the end of 12 years.
Pay Yourself First
So you have seen the power of investment and would like to start. The first step you can take is to pay yourself first, by having a savings plan. Work out a reasonable amount to save per month. Do not, just because you want to save a large amount, make yourself suffer in the process. It is very likely that you would not stick to your savings plan if you do that.
Once you have decided how much to save, you can either shop for a savings plan in the market. These savings plan will deduct a fixed amount of money, that is specified by you from your bank account every month. Most of these plans allow you to take out these money if you wanted to but since it is your savings plan, you should touch it only as a last resort or to meet a large financial need like purchasing property, wedding or prepare for newborn. Example of these plans are POSB MySavings or OCBC Monthly Savings Account
Seeking Higher Returns
If we seek higher returns investments, we can see that we can have a larger amount of money accumulated at the end. But one must note that higher returns also mean higher risks as well. If you have a longer investment horizon, you can put into investments that have higher returns and be able to ride out the high volatility of such tools. It is strongly recommended that if you want to move to other investments, do study the investment tools so that you increase your chance of successful investing.
