The Magic of Compounding

~ BY INVESTOPEDIA.COM~

Grow your 'FFA' Year Over Year

Assume we already had some money in 'Financial Freedom Account' and now is how to grow it on yearly basis ?? Before talking about investment vehicles, I would like to introduce an important concept called 'COMPOUND INTEREST'.

Say if we started with RM10K today and grow it 100% per annum, we'll end up with RM5 million in less then 10 years. 

Table below shows the power of compounding at work ...

The earlier you start the better !

Albert Einstein believed compounding is the eighth wonder of the world. Even though the amount doesn't look much at the beginning, it starts to gather momentum and magnifies return in the last few years before your retirement And the most important thing is 'Starting Early'..

Take below example for two different investor :

'Mr. Y starts at the age of 24 and invest RM2000 for consecutive 7 years. Starting 8th years he stops to contribute fund and let his money compound year over year at the rate of 15%.'

'Mr. X starts at the age of 31 after he finally has some money to invest after quitting party-boy life style. He contributes RM2000 every year until the age of 55. Same annual growth rate at 15%.'

End of the investment cycle, Mr. Y realise the larger investment sum at an impressive return of 5885% with his RM14000 in total compared to 879% return rate from RM50000 in total by Mr. X.
 

Mr. Y enjoy more return % with lower investment due to the power of compounding effect, no rocket science here.

Fix Deposit = Safe Haven ?

Majority of people love fix deposit because of its nature of protected capital as well as higher interest rate (if compared to conventional saving rate). However the good old day where fix deposit rate at 7-10% (year 1980-1998) already passed it, at 3% today it can even beat the inflation rate at 5-10%. 

Take below example for two different investor :

'Miss. A is a conservative girl who keep all her money as fix deposit in the bank. Deposit per annum is RM 2000 and interest rate is 3%.'

'Miss. B starts to invest in stock market with the same deposit of RM 2000 per annum. Even with the volatile market, she generates return at an average rate of 15%.'

At the age of 55, Miss B's net worth is RM1.3 million vs Miss A's RM110K, with the same investment of RM64K. Even if we understand compounding can magnify returns, we need to ENSURE RETURN IS HIGH enough for wealth accumulation.

Miss B now has a choice to convert everything into fix deposit, the 3% interest from RM1.3 million should be enough to cover majority of her expenses after retirement, not to forget she still has her net worth in 'Long Term Saving' (LTSS) account.

 

Miss A can't put her money into stock market because at this age she can't afford to risk her old day saving, and the 3% fix deposit interest from RM108K is just insignificant.

    

Risk it When You're Young ...
Risk your money in 'FFA' When You're Young ...