Many of us want to retire comfortably, retire rich and retire without having to worry about money anymore. For a meaningful retirement, we must have a substantial amount of money to tide us through our retirement years. Even for short-term goals such as to finance a house, finance your child’s education or to finance a new care, we need to have enough moolah. For wealth accumulation to take place, three things are paramount. They are:
- Investing as long as possible (time)
- Amount invested and to be invested in the future ($)
- Investing in instruments that give a substantial yield (returns on investment or ROI)
All three elements must be fulfilled before we can reach our financial goal. We will look at each element in detail below.
The earlier we start investing, the better our returns can be due to the effect of compounding. Albert Einstein once said that compound interest in the eighth wonder of the world. Compounding allows our money to increase exponentially for the long-term. This can be seen from the graph below. By compounding, the graph shoots to infinity towards the later part of the investing timeline, although gains are minimal at the start. Thus, a young investor in his twenties will have more time to compound his money over a person in his forties who just starts investing.
Image courtesy of http://www.tvmcalcs.com/tvm/lumpsums_fv
To start investing, we need capital. This can come from your savings mainly. As working adults, we should aim to save at least 10% of our monthly salary and we can slowly increase this percentage as our income increases. Without savings to start with, one cannot make more money by investing in the stock market.
Leaving money in the bank yields less than 1% in current market situations. Couple that with raging inflation that is around 5% currently, we are getting negative returns on our money. This makes the case for investing much stronger. The general stock market has yielded around 9-10% historically. By investing in fundamentally strong companies, your returns can be higher. However, don’t be cheated by claims cited by certain investment companies that can give u phenomenal 50% returns per annum. If it’s too good to be true, it probably is.
Below is a table with three different scenarios to illustrate my points above.
If you want to play around with the various figures to suit your financial life, you can visit the online “Compound Interest Calculator”.
To use the calculator,
1. Key in the current amount that you have currently invested under “Current Principal”. If you don’t have any money invested currently, type in “zero”.
2. Key in the amount you will invest yearly (take note: not monthly). For example, if you are going to invest $200 monthly, key in “2400”.
3. Key in the number of years you plan to invest.
4. Key in the yield of the instrument. You can key in 9% as that’s the historical stock market return.
5. Key in “1” in the next row.
6. Select “end of compounding period” in the following row and click “Calculate”. You can see the future value (how much you will have at the end of your investing period).