The
earlier you start putting money aside for investment,
the better it is for you. The amount that you put aside,
if allowed to grow at a compounding rate, can make you
a richer person sooner than you realise.
Compounding
means adding the interest earned to a principal sum
that you have invested, and letting the total sum earn
even more interest, which is again added to the total
sum. As the investment base
grows
larger, it gains the potential to grow even faster. Time
is an important factor in compounding growth. Here is
an example of how it works:
20,000
Compounded over 10 Years
Years
At
10% growth
At
7% growth
At
3% growth
1
20,000
20,000
20,000
2
22,000
21,400
20,600
3
24,200
22,898
21,218
4
26,620
24,501
21,855
5
29,282
26,216
22,510
6
32,210
28,051
23,185
7
35,431
30,015
3,8812
8
38,974
32,116
24,597
9
42,871
34,364
25,335
10
47,159
36,769
26,095
Take
RM20,000 and let it compound over 10 years at 3%, 7% and 10%.
See how much you end up with after 10 years, if you keep ploughing
back the interest or dividend earned into the principal sum.
At the rate of 3%, your money would total RM26,095, while
at the rate of 7%, you would get RM36,769. Now at the rate
of 10%, after 10 years, your savings of RM20,000 would have
grown to RM47,159.
Putting
your money in a savings account, if at an interest rate of
3% and allowing for compounding growth, will yield RM26,095
after 10 years. Now, investing in quality stocks has the potential
to yield returns equivalent to compounding at 7% or 10%. Investing
in prime property too can yield high returns, particularly
if you have invested in good locations in the Klang Valley
of Kuala Lumpur. That's why many people choose to invest in
shares and property - for the possibility of obtaining higher
returns than leaving the money as savings or locked away in
a fixed deposit box.
But
can you handle the potential RISK if you wish to earn high
returns? The property market can be volatile and it could
be disastrous if your money is tied up in a piece of property
whose price has plunged, just when you need to sell it off
for some cash. Similarly, for investments in the share market,
the possibility of higher returns is always matched with a
higher possibility of losing your money.
