The benefits of investing when you're young

During secondary school days, I always remember we have to do maths question on simple interest and compound interest. As my maths was not very good during my younger days(often failing my exams), i only understood simple interest but cannot seem to understand the concept of compound interest. I remembered I spent a lot of time looking at the question, putting the numbers in my calculator just to find out how compound interest works. Through the patience of a good maths teacher in secondary school, i manage to get quite a reasonable grade during my O levels and it grew my love for numbers.

Fast forward to today, compound interest is still a concept which is important in our lives. Understanding how compound interest works may probably change your life once and for all. Compound interest works through time. The longer the time period, the faster the compounding effect.

Let's illustrate with examples of 2 scenarios:

1) Suppose you have zero savings now and you want to achieve 1 Million dollars in 20 years, how much do you need to save per month? The answer is 4166.66 per month. Saving this amount is quite hard for most people unless you have very high pay.

2) However, if similarly you have zero savings now and also want to achieve 1 Million dollars in 20 years, you can actually just save $2000 per month. If you invest $24000/year($2000x12) and let the money compound at 8% per year(with interest reinvested), you would have achieve 1.19 Million by the end of 20 years. Now saving $2000 per month may be more achievable. The key is you must invest your money and let it compound. In fact, if you think 8% return is too high, even at 7%, you would similarly have achieved 1 Million dollars(1.05 Million to be exact) in 20 years. The 8% interest can come in the form of dividends from stocks. Reinvest the dividends to let it compound.

Some people may say 20 years is too long. Yes it is if you start investing late. If you start investing at the age of 25, 20 years later you are just 45 which is still not too old for many. Achieving 1 Million dollars is possible for most average income earners.

Start investing when you are young to experience the benefits!

Watch the following video to understand how investing can compound your money in an unimaginable rate:

If you would like to learn how to start investing, read this post which i've written sometime back last year: Investing basics - How do I start investing?

*All figures above are denominated in Singapore dollars 

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