By FNN (guest contributor)
Most of us want to retire comfortably, rich and without having to worry about money anymore. For a meaningful retirement, we must have a substantial amount of money to tide us through our later years. You also need to save enough money for shorter term goals such as to finance a house or your child’s education. For wealth accumulation to take place, three things are paramount. They are:
1. Investing as long as possible (time)
2. The amount you have invested and will invest in the future (money)
3. How much you make from what you invest in (return 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 is the eighth wonder of the world. Compounding allows our money to increase exponentially for the long-term. A young investor in his twenties will have more time to compound his money over a person in his forties who has just started investing.
To start investing, we need capital. This will mainly come from your savings. 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.
3. Return on Investment
Leaving money in the bank yields less than 1% currently. Couple that with inflation of around 5%, and 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 you 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).
By guest contributor FFN, an avid investor who has completed the Associate Financial Planner course, and who blogs at A Journey Towards Financial Freedom. Posted via www.MoneyMatters.sg, your guide on how to make more money, save smarter, invest intelligently, and enjoy your money like a pro. Click here to get our free report on what you must know about financial freedom.