The first scenario: Two person starting with $10000 capital and no extra savings for the rest of 20 years
This comparison shows two person, one who doesn't invest and the other one invests. First person as seen in calculation one has their money eaten up by inflation (3% average inflation rate for Singapore). By the end of 20 years, his money is almost halved. It takes approximately 23 years for your money to shrink by half if inflation rate is 3% on average. Person 2 invests his 10k at a annual return of 10%. By the end of 20 years, his 10k has increased to $73281. That is 7X in 20 years.
2nd scenario: Two 25 year old starting out with a capital of $10000 each and saves $500 monthly.
Person A who does not invest will end up with $95578 when he is 45 years old and person B who invest at 10%p.a ends up with $456,129 at age 45. That is 4 times more as compared to a person who doesn't invest.
3rd scenario: If person A saves double at $1000 but still doesn't invest
Even though person A saves $1000 which is double of person B, he still has lesser money than person B who invest. This shows that even if you save more but don't invest, you will still be worse off. That is the reason why some people who save and spend little are still poor when they are older.
How do you become a millionaire in 15 years?
If you start at 25 years old with 10k, you can be a millionaire by age 40. Just save $2500 every month and invest at a return of 10%p.a. Is it possible to save $2500 every month? I would say its quite hard unless your income is very high which is unlikely if you're in your 20s. The solution? Increase your investment rate of return to more than 20% p.a and you just need to save roughly below $1000 and invest it.
Conclusion
To be rich, learn to increase your investment rate of return and save more. If you can achieve both at the same time, then you'll shorten the time to be a millionaire. If you do not invest above the rate of inflation which is 3%, then your savings will shrink due to inflation.
To find out how long it takes your money to double, use 72 divide by the rate of return. For eg, 72/24=3
This means if your investment return is 24%p.a, your money will double in just 3 years compounded.
To find out how long it takes your money to halved due to inflation, use 70 divide by the rate of inflation. For eg, 70/4=17.5. This means your money will devalue by half in 17.5 years if inflation rate is 4% on average.
To read part one of this series, click here:
Would you be able to advise how to invest to get 10% pa consistently?
ReplyDeleteHi,
DeleteYou can invest in an index fund. One such example is the STI ETF which tracks the Singapore straits times index. This fund has returned an annualized return of 9% for the past 10 years without dividends. Add in the dividends its about 11% annualized return.