The power of compound interest
This illustrates that at a higher interest % rate per year, you would require fewer years to double your money. In Singapore particularly, there are unique products like the CPF which also helps to support each individuals endeavour to grow his or her money.
The beautiful rule of 72
You can see in the chart illustrated above, where the black numbers on top represent the number of years, and the interest % represents the rate of return needed to double your initial capital.
It is compressed into this simple formula you can see here:
Simply divide 72 by a constant Rate of return, one will be able to derive the amount of time required for their investment money to double.
|Rate Of Return||Number Of Years For Investment Money To Double||Examples|
|2%||36||CPF OA/ Bonds|
|8%||9||DIY/ Stock Picking|
An example: What strategy to double $10,000?
Joe, 25 just graduated recently and has been working for over a year now. He has been reading up and is looking for ways to make his money work for him.
Step 1: Determine your investible cash
He has saved up $10,000 excess cash (outside of rainy day savings) and aims to invest all of this $10,000 into the market today.
Step 2: Determine your investment timeframe
- How many years?
For Joe, as he is younger, he has plans to set aside this $10,000 for a period of around 20 to 25 years.
Step 3: Understand which products meet his time requirements
We have the full list of investment products here for you to understand. But instead, let us simplify it for this example.
Joe would probably choose to either
- Top up his CPF SA (but this will go beyond the 20-year mark but at a higher interest rate) or
- Buy into a 10 to 20-year bond which offers him an interest of around 3%.
|Financial Product||Risk Level||Interest Rate Per Year (Return)||Time to double capital|
|Savings Account||Lowest||1%||72 Years|
|CPF OA||Lowest||2.5%||28.8 Years|
|CPF SA||Lowest||4%||18 Years|
|Index ETF (eg STI)||High||6%||12 Years|
|DIY Stock picking||Highest||10%||7.2 Years|
Conclusion: This is the foundation of investing
At the end of the day, this is probably one of the easiest approaches to understand the compounding effect of money and also what products meet your timeframe.
Do your own due diligence and if you are keen to learn more, you can find out more about when you should look at investing, and what portion of your monthly income you should set aside for investments. Cheers!