Hey there, nothing perks you up like a frappuccino on a bad day? Perhaps it is not a frappuccino that does it for you, but we are not really here to talk about your fav coffee fix. But have you ever wonder what you could have if an additional S$6 dollar a day is set aside?
Before that, let us have a really quick re-cap on the concept of compounded returns.
Let us get down to finance. To be clear, this post is not entirely about your daily coffee fix. That is just a proxy for all the little things you spend on a daily, weekly or monthly basis. Be it the daily Starbucks coffee, the pack of cigarettes every couple of days or weekly clubbing at Clark Quay.
Concept of compounded returns
Why should you care about any compounded returns when there is nothing being saved to compound on right? That is exactly the point of compounding returns. You set aside a little bit of your money to work for you over time by generating financial returns on itself. The financial returns are then a part of the little bit of money you set aside. Now, more money is available to generate financial returns on itself.
In other words, compounding is the increase in the value of an asset over time. Really if you wish to go into the maths, read the article below.
Read about: Missing out on compounding returns?
If you had set aside some savings regularly
For simplicity sake, we go with the figure of S$6 dollars a day, that you could have set aside. This works out to S$180 a month, which is a fairly reasonable amount spent on the above-mentioned activities. It may or may not seem like a lot of money, but that is without factoring any compounding interest or investment returns.
Let us go through some possible scenarios below:
1. Choosing to invest into an Investment Portfolio
Taking a yearly figure of S$2160 yearly ($180 x 12 months), you choose to diversify your savings into an Investment Portfolio for higher returns. Your savings are placed into Unit Trust Funds, ETFs or Investment Linked Policy, or any combination of them. Assuming realistic long-term average financial returns of 8% per annual, here is what you will be looking at:
In 20 years time since you started saving S$2,160 yearly, your investment portfolio should be valued at S$98, 845.84 from a saving amount of S$43,200. In another 10 years time (30 years from the start), your investment portfolio should be valued at S$244, 691.74, from a saving amount of S$64,800.
Read about: Reasons to invest into Unit Trust Funds
Read about: Investment Linked Policy: How does it work?
There will surely be volatility in an Investment Portfolio, and withdrawing your funds in a market downturn may lead to losses. But you already have emergency funds set aside right? This S$180 should not have been all you set aside for your future finances in any case.
Read about: Managing your Investment Portfolio
2. Choosing decent returns and insurance coverage
Taking the yearly figure of S$2160 yearly ($180 x 12 months), you choose to diversify your savings into an Insurance Portfolio for future returns and protection coverage. The savings are placed into an Endowment Policy or Whole Life Policy or any combination of the two. As a portion of your savings goes towards Health and protection coverage, the long-term financial gains are assumed lower at 3% per annual. Here is what you will be looking at:
In 20 years time since you started saving S$2,160 yearly, your insurance portfolio should be valued at S$58, 040.01 from a saving amount of $43,200. In another 10 years time (30 years from the start), your insurance portfolio should be valued at S$102, 762.94, from a saving amount of S$64,800.
Read about: Endowment Policy: How does it work?
Read about: Whole Life Policy: How does it work?
For having health and protection coverage, you end up with lower financial returns compared to investing. Withdrawal and liquidity may not be as flexible compared to the investing due to the fixed or long-term commitment required. But you build up your Insurance Portfolio, which a part of your finances had to go into anyway.
Read about: Managing your Insurance Portfolio
3. Choosing to let the money sit in a bank account
Taking the same yearly figure of S$2160 yearly ($180 x 12 months), u decided not to take any risk or commitment that comes with any financial product. The savings is saved regularly into a savings account and deposit earning an average 1% interest annually.
In 20 years time since you started saving S$2,160 yearly, your cash savings should be valued at S$47, 561.05 from a saving amount of $43,200. In another 10 years time (30 years from the start), your cash savings should be valued at S$75, 135.37, from a saving amount of S$64,800.
Assuming a 2.5% to 3% inflation rate, your purchasing power is actually lower than the value of your saved amount. This is due to prices increasing at a higher rate than the interest rate you are receiving for your money.
Read about: 5 ways you can overcome rising inflation
Still, the end result is better than you not even making any effort to plan for your finances. Which brings us to the final scenario.
4. Choosing not to do anything after reading this
Assuming you are in your 20s to 30s now, you choose to fully enjoy life little pleasures with no regards to your finances. Along the way, your peers start to managing their finances and future plans. At a certain point in time, they will be sitting back to relax as their financial management is sound and well planned.
As lifestyle changes, they may be discussing their plans for business ventures, money making or investment tips. However, despite the years catching up with you, your work effort has to be maintained. You will have to continue working in the same job capacity, putting in the same effort to maintain your usual daily necessities and expenses.
Read about: No budget for financial planning?
There is no guarantee that the above guide will certainly beat inflation or make you as wealthy as Bill Gates. While there is a financial risk no matter which option u choose, take the first step and start planning for your finances.
You can thank us now, or later.
Drop us a message if you want to know more on any of the above.