Albert Einstein once said “Compound interest is the eighth wonder of the world. He, who understands it, earns it; he who doesn't, pays it”.
We learn how to calculate simple interest and compound interest during our youth, but how many of us apply them in real life?
Simply put, interest works wonders when the monies you have saved aside, also earns monies for you. Let us dwell into how a median wage earner is able to achieve their first $100,000, and how much simpler it will be to achieve the next $100,000.
Profile: Graduate, Gross Income of $3,500
| Take Home Pay |
$3500 X 80% = $2,800 |
| Parent's Allowance |
$300 |
| Transport |
$200 |
| Basic Living expenses |
$1000 |
| Entertainment |
$300 |
| Monthly Saving: |
$1000 |
| Annual Saving: |
$12,000 |
Effect of compound interest
Savings at year - Assuming saving habit of $12,000 per year
| Interest Rate |
0.05% |
2% |
4% |
6% |
8% |
| 1 |
$12,000 |
$12,000 |
$12,000 |
$12,000 |
$12,000 |
| 2 |
$24,012 |
$24,480 |
$24,960
|
$25,440 |
$25,920 |
| 3 |
$36,030 |
$37,210 |
$38,438 |
$39,686 |
$40,954 |
| 4 |
$48,054 |
$50,194 |
$50,194 |
$54,788 |
$57,190 |
| 5 |
$60,084 |
$63,438 |
$67,034 |
$70,795 |
$74,725 |
| 6 |
$72,120 |
$76,946 |
$82,196 |
$87,763 |
$93,663 |
| 7 |
$84,162 |
$90,725 |
$97,963 |
$105,748 |
$114,116 |
| 8 |
$96,210 |
$104,780 |
$114,362 |
$124,813 |
$136,205 |
| 9 |
$108,264 |
$119,115 |
$131,416 |
$145,022 |
$160,062 |
| 10 |
$120,324 |
$133,738 |
$149,153 |
$166,443 |
$185,827 |
| 11 |
$132,391 |
$148,653 |
$167,599 |
$189,150 |
$213,653 |
| 12 |
$144,463 |
$163,866 |
$186,783 |
$213,219 |
$243,705 |
| 13 |
$156,541 |
$179,383 |
$206,734 |
$238,732 |
$276,162 |
| 14 |
$168,625 |
$195,211 |
$227,484 |
$265,776 |
$311,215 |
| 15 |
$180,716 |
$211,355 |
$249,063 |
$294,442 |
$349,072 |
| 16 |
$192,812 |
$227,822 |
$271,506 |
$324,829 |
$389,957 |
| 17 |
$204,914 |
$244,618 |
$294,846 |
$357,039 |
$434,114 |
By saving $12,000 annually, the approximate number of years to reach the:
| Interest Rate |
0.05% |
2% |
4% |
6% |
8% |
| First $100,000 |
9 years |
8 years |
8 years |
7 years |
7 years |
| The next $100,000 |
8 years |
6+ years |
5 years |
4+ years |
3+ years |
*Actual figures may differ*
We can observe that it may take on average 7 - 9 years to achieve the first $100,000, at an interest rate of between 0.05% to 8%, by saving $12,000 a year.
It is a slow and painstaking process, but your first $100,000 savings will do the heavy lifting for you thereafter.
To save the next $100,000 (i.e. saving $200,000 in total), it will take a shorter period of time with the help of compounding interest. One may also consider alternative form of accumulating wealth such Endowment, ETF, Unit trust, Stocks or Bonds, which may potentially give a higher potential yield.
Newton's first law states that, if a body is at rest, it will remain at rest unless it is acted upon by a force. Saving your first $100,000 will require plenty of discipline and sacrifices, but more importantly, it is important to take the action and start your saving journey.
Speak to our trusted financial advisors to find out on the various instruments to kick start your journey!
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