Read how Compounding Interest grows your money across different Interest Rates and Time Range. Also understand the Rule of 72.
Have you checked out your local banks’ websites (notice the ‘s’ for the banks) and their revised interest rates for having a normal savings account with them?
If you have not… please do check them out now and come back to this post later… because if you have always depend on your savings account to plan and fund your retirement, it’s time to think twice and plan otherwise!
For The Privileged Few Who Keep Their Earnings In The Banks
I do know of a few friends and acquaintances who are earning way beyond their means and they are good with their personal finances and planning as well, therefore even though the Banks are not giving them “that good” interest rate, their own earning abilities will help them through…
But if you are still working towards being like them… you can consider taking on these few suggestions to help you make your money work harder! They are not guaranteed to work for everybody but if you are persistent enough, they may just work well for you along the way!
A Lesson First – What Does The Interest Rate Work For Your Money In The Bank?
Back when some Local Banks can still offer an interest rate of around 1% per annum, if you manage to have $10,000 with them, you can see a good $100 being given to you as a form of interest at the end of the year. And if you keep that amount + interest for another year, you will have an additional $101 being added on. May not seem significant but if you do the calculations, the additional amount will just keep increasing as long as you do not touch the money!
The additional and increasing amount that’s being given to you is due to the Magic of Compounding Returns and because of the number that’s being attached as the Bank Interest Rate.
Secondly, if you want to know how long it will take for this $10,000, you can use the Rule of 72 to calculate the estimated number of years needed with that interest rate. Simply take 72 to be divided by 1 (the interest rate) and you will simply get 72 years! Don’t look too shocked as yet!
Now… When The Local Banks Decide To Lower That Interest Rate To An Even Lower Rate
When the interest rate is lowered down to just 0.1%, your $10,000 is just making you $10 a year (instead of the usual $100) and it’s also taking 720 years for that money to double! You can look shocked now!
So is this how you want your hard-earned money to work harder for you? If not, it’s time to make some adjustments and take on some of these suggestions…
How To Make Your Money Work Slightly Harder…
#1 Put Your Money Into Fixed Term Deposits With Local Banks or Foreign Banks
You can start shopping around for Fixed Term Deposits with different banks. Not all banks offer the same interest rate throughout, so it’s advisable for you to check out the different rates being offered. For example, I have came across Banks from India (but having their offices in Singapore) that offer slightly higher interest rate as compared to local banks.
#1.5 Put Your Money With A Foreign Country
This little tip is shared by one of my clients who operates a business in Vietnam. Because he works and stays there most of the time, he is able to open a bank account over there and guess what… the interest rate for their savings accounts is, on the average, a double digit per year!
If you do have the chance to work overseas for awhile, it’s advisable to check out this opportunity! But do take note of the terms and conditions attached to it.
#2 Put Your Money Into A Single Premium Plan With An Insurance Company
You may not get a double digit interest rate but you will definitely get higher interest rate as compared to a Fixed Term Deposit, given that you are comfortable with setting that money aside for a longer time frame.
Are You Holding On To Any Credit Cards?
(Image courtesy of LotusHead of sxc.hu)
If so, have you been making payments (in full especially), for your credit purchases, on time?
If you are not and just making the payments for the bare minimum and having signs that you are going to default the next few payments, then these are some signs that you are going to have Credit Card Debt Issues!
The Problems Associated With Credit Card Debts
With all the perks offered for having Credit Cards, there’s also the negative side to having them especially if you are one of those who have issues making full settlement on time. Time also has a part to play because of the existence of the interest rate and this interest rate is compounding!
To have an interest rate compounding on your outstanding debts can be quite scary in the long run… Imagine just have a debt of $1,000 and an annual 24% per annum Finance Charge imposed on this amount. And there’s the common practice of using 2% (24% divided by 12 months) per month to compound.
So your actual outstanding loan per month will be like this:
- First Month $1,000 + $1,000 x 2% = $1,020
- Second Month = $1,040.40
- Third Month = $1,061.21
- Fourth Month = $1,082.43
- Fifth Month = $1,104.08
- Sixth Month = $1,126.90
- Seventh Month = $1,149.44
- Eighth Month = $1,172.43
- … Twelfth Month = $1,269.07
From the mere of $1,000, the debt grew to $1,269.07 at the end of a year. And what I have shown you is just a simple illustration of a small loan debt (is your usual debt usually this small?) and that you are not going to make any further credit card purchases (is it possible? are you able to avoid the temptation?).
Along with a growing Debt, there’s also the other problems like:
- Your Credit Score being affected – you may not be able to take up loans in the future (even if it’s a time of emergency)
- Your Savings Affected (together with your Financial Objectives) – if you do not get out of this situation fast, your long-time savings may get used up fast, resulting in you not achieving your Financial Objectives.
- No Peace Of Mind – just think of the number of letters you will be receiving for late bill repayment or even personal calls checking on your financial situations.
- Lifestyle Affected – at times like this, you may find it hard to ask for loans from your friends or family. It’s not their fault. They do have their own financial commitments.
If you do not wish to be facing such issues, you must be aware of these:
15 Clear Signs That You Are Going To Face A Credit Card Debt Issue
Are you prepared for your Retirement?
Most people will say no, that’s no surprise, because to these people, Retirement Planning starts only at the last 5-10 years of their working life. Whatever they have by then will determine the kind of lifestyle they will live during their Retirement. And also a risk factor to consider is that a sudden high expenditure during Retirement will deplete this amount drastically, leaving the future really uncertain…
So should you be noticing this kind of situation, and you do not wish to be in it, then it’s time to take into considerations to a comfortable retirement.
The Factors To A Comfortable Retirement:
2. The Interest Rate
3. The Lump Sum Amount
The First Factor – Time
Are you currently having a loan? It can be of any type – Credit Cards, Policy Loan, Student Loan, Car Loan as long as you are owing money.
And are you keeping watch of the compounding interest rate on those outstanding loans, especially those that charge you 5% and above? If you are not doing so, it’s better to wake up, dig out those accounts and clear as much as possible!
Reason being that Compounding Interest Rate can be both an Angel or a Devil working for you!