In the previous chapter I have covered the subject of interest
rate. Yes, one of the most hated things on earth. Who wants to pay extra huh?
Those wretched banks!
Please remember however that there are always two sides of the
same coin. If you borrow, you will pay interest but if you invest, you will
receive interest, dividend, profit or whatever name that you wish to call it.
The bottom line is still the same - everybody wants to make
money.
Banks, businesses, government agencies, YOU. Nobody wants to
lose money. So don't hate them so much. Some of them are actually your friend.
Now I will introduce a new concept called compound interest. I
keep on repeating that if you wish to be financially free procrastination and
time are your greatest enemy.
Compound interest arises when interest is added to the principal, so that,
from that moment on, the interest that has been added also earns interest. This
addition of interest to the principal is called compounding.
Compound interest may be contrasted with simple interest, where interest is
not added to the principal (there is no compounding).
Compound interest is standard in finance and economics, and
simple interest is used infrequently.
In the investment world,
compounding is your new best friend.
Do you know that if you have $10k now and put it in a fund that
gives 8% p.a. return year-on-year in 10 years time that $10k will be $21.6k and
in 20 years it will be $46.6k? If it is 10% p.a. then it will be $25.9k and $67.3k.
You don't have to do anything, just leave it there.
This reminds me of my late grandma's unit trust account. A few
years ago, while cleaning up I found her old unit trust book. Inside her
account there was $20 balance.
The last transacted date was in the late 80s. When I updated my unit
trust book, I asked the bank officer to update her book as well, just in case
there is still some balance left.
I was not expecting much but was pleasantly surprise to find
that a mere $20 after 30 years became $3.2k! Imagine if that $20 was actually $2000.
$320k is no joke! Unfortunately it is not.
The point that I'm trying to make here is start your savings early. When it
comes to generating wealth, it doesn't
matter how much you earn. What matters is how much you save.
If you earn $5k a month but you spend $5.5k every month, you are
doomed to work for the rest of your life.
But if you earn $2k a month but you save $1k every month,
believe me you have a very good chance of making it.
"Good habits once
established are just as hard to break as bad habits and bad habits are easier
to abandon today than tomorrow. So what are you going to do about it?"
― Lucas Remmerswaal
― Lucas Remmerswaal
When I was in secondary school, there were surveys done every few
years to check our level of savings. Our class teacher will ask for our savings
book. My teacher always wonders how come the poorest student (me) has the most
savings!
It was no great mystery actually. I just saved everything since
primary school days. Money that I got during celebrations or special occasions
were mostly saved instead of spent on toys.
When I was in university, the same basic formula was used. I
will try to save most of my scholarship money. During holidays, I will work
part-time to increase my savings.
During my early working life, you guessed it right! The same
basic formula was used. I will try to save as much as possible.
During those early days, there were very few luxuries in my life.
When my fellow students were complaining about the
"quality" of hostel food (that we had prepaid at the
beginning of every semester) and would rather fork out extra money to buy and eat
something else, I was wondering how could a proper meal of rice,
chicken/beef/prawn, vegetables and fruits be worse than an oily plate of char kuey
teow that they love so much?
I suppose that is a malady of rich kids.
When you embark on this journey, be prepared to be called
offensive names. Cheapskate is one of the nicer ones! Just persevere. You have
a mission. Nobody is going to sway you from it! Fighting!