Invest early to beat inflation and to benefit from compounding

Why?

 

Because compounding matters. 

 

When you invest, you benefit from compounding. Compounding allows you to grow your savings more quickly. The sooner you start investing, the quicker your money will grow. 

 

Feeling brainy?

 

Imagine you’re earning a 3% return on RM1,000 after one year, the result is just RM 1,030. Now, imagine you leave the money there and you earn another 3% that year. You do this for the next 50 years. Guess how much you’ll have in the bank?

 

Just take: RM1,000 + (RM30 x 50 years) = RM2,500

 

Not bad, you think? 

 

Well, the actual number is much, much better. It turns out you’ll make RM 4,384 by just keeping your money in the bank where it earns 3% interest. The secret is that in the second year, you aren’t earning 3% on RM 1000, but 3% on RM1,030 (the amount you had first put in plus the interest you earned) which works out to RM30.90. Your interest earnings will then increase by even more as the years go by.

 

Check out the graph below to see exactly how your money would have grown in that 50 year period.

 

 

Invest early to beat inflation and to benefit from compounding 1 - Multiply -

Because of inflation

 

If you don’t invest your savings, it will be slowly ‘eaten’ away by what’s known as ‘inflation’, which is how our money loses a little bit of its buying power over time. You know the story, in 2018 you went to the market and bought fish for RM15, in 2019 you go to the market and it’s RM15.30. Next year, it’ll probably be higher. 

 

Now imagine if you had put the RM15 in a savings account at 0.8% returns in 2018. You would have had RM15.12 in 2019 which means you can’t buy the same amount of fish as you did in 2018.  

 

If instead, you had invested the same money in an FD at 3% returns, you’d have made RM15.45 which would have allowed you to buy the same amount of fish and have some cash to spare. This is exactly why investing is so important. 

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