Lorna Tan, in the article ‘Start early, and time is on your side’ (The Sunday Times, 27 May 2008), suggests that the greatest benefit of saving early is the ability to reach financial independence more easily. This is achieved through the effect of compound interest. Compound interest allows one to earn interest on interest, thus the larger the amount you save now, the easier it is to attain a particular amount of money in the future. This is well exemplified in Tan’s article:
Consider this: If you start saving at the age of 20, putting away $2,000 a year until you reach 30, and you continue to stay invested without any further input of cash till you turn 63, you will have nearly the same amount of money socked away as a person who also saves $2,000 every year but starts a decade later, between the ages of 30 and 62.
To illustrate this, let’s assume Mr A started a yearly investment of $2,000 at age 20 and stayed invested for 10 years, at a rate of return of 6 per cent. Then, from age 30 to 63, he allowed his investment to continue growing at 6 per cent without any further annual inputs of $2,000. At age 63, his investment would total about $191,150.
In contrast, take the case of Mr B, who embarked on a yearly investment of $2,000 only when he turned 30. He must continue putting in $2,000 a year all the way till he turns 62 before the total value of his investment grows to about $192,690.
Besides the effect of compound interest, what other factors would you consider when deciding how much to save now?
Also, why is saving important? Is there an appropriate amount to save/danger of over-saving?
– ‘Start early, and time is on your side’. The Sunday Times. 27 May 2008. <http://www.asiaone.com/Business/My%2BMoney/Planning%2BYour%2BRetirement/Investment%2BAnd%2BSavings/Story/A1Story20080526-67088.html>.
– ‘Budget Beginnings’. MoneySENSE. December 2003. <http://www.moneysense.gov.sg/resource/publications/guides_publications/Budget_Beginnings.pdf>.
– ‘Managing Your Day to Day Money’. MoneySENSE. December 2003. <http://www.moneysense.gov.sg/resource/publications/guides_publications/Managing_Your_Day_To_Day_Money.pdf>.