Friday, April 25, 2008

Who wants to be a Millionaire?

Theoretically, anyone of us will become a millionaire eventually. Even if we are just making RM1,000 a month without any increment, we will become a millionaire in approximately 83.33 years. Isn’t this great, Mr. or Miss Millionaire?

But we all know that this is not true in real life. Firstly, we don’t get to keep the full amount of what we earn. We have to pay for taxes and daily expenses. Secondly, sometimes we simply overspend. We earn RM1,000 but spend RM1,200. Thirdly, and most importantly, time is the crucial factor. Even if we got to keep the full amount of our earning, we don’t want to spend, or we don’t have, that much of time, to accumulate the asset.

So, we need about 83.33 years to accumulate RM1 million, if we can save RM1,000 per month consistently, right? Well, unless we’re keeping the money under our pillow, it actually takes lesser time to achieve our RM1 million goal.

Welcome to the world of Compounding Interest. In short, Compound Interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on.

Let take a look at an example. Assuming we have RM100,000 of savings now. How fast can this RM100,000 turn into RM1 million is dependent on the financial vehicle that we choose. Every financial vehicle attracts different compound interest rate. The higher the compound interest rate, the shorter the time for the money to grow.

Annual Compound Interests vs. Number of Years

So, if we park and leave our money in a financial vehicle that offers 3.70% of compound interest annually (such as in the fixed deposit), our RM100,000 will grow to become RM1 million in about 65 years. If we park and leave our money in a financial vehicle that offers 5.80% of compound interest yearly (such as the dividend rate declared by EPF in year 2007), our RM100,000 will become RM1 million in about 40+ years.

Now, are we satisfied? Are we happy with that kind of return? Do we know how much compound interest are we getting now? Shall we have an option, will we want to get our RM1 million, or multi-million, or multi-billion, as soon as possible, or just let time do its work?

Question: Do you know where and how to get the financial vehicle that offers higher compound interest? If you don't know yet, stay tuned, as I'll show you the ways to enjoy optimized returns.

In a nutshell:

  1. So long as we don’t mind to wait (factor out time issue), we’ll get what we want eventually.
  2. How much we earn is not important. It’s how much we save that makes all the difference.
  3. We must take actions if we want to make our money to work harder for us, rather than we work harder for the money.

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