As your parents must have said before, money doesn’t grow on trees.
But, it can grow when planted in the right places – places that earn you interest.
Earn More Without Working More
You’re here because you want to make more money and reach your financial goals, right?
Sure, you can work harder, put in more hours, get a promotion, or start a side hustle. But, these require a lot of time and effort.
If you want a way to make your money work for you, in addition to you working for money, you need to start thinking about passive income.
The Easiest Way to Earn Passive Income
There are many ways to earn passive income, such as renting out a property or setting up a digital product. But perhaps the easiest way to get started is to earn interest.
You might remember learning about simple and compound interests back in school. As a refresher, think of interest like a thank you gift you get when you lend others money. When you have a savings account, you’re ‘lending’ the bank money and thus, they reward you with interest. Yay!
Say, you have RM1,000 in your account and the interest rate is 5% per annum. At the end of the year, you will have RM1,050 in your account. This is a thank you gift of RM50. With simple interest, you will continue to be rewarded an extra RM50 every year, based on your initial deposit of RM1,000.
That’s great and all, but you can do better.
The Power of Compound Interest
Compound interest is essentially interest earned from interest earned previously.
Let’s go back to the RM1,050 you have in your account at the end of the year. With compound interest, you will have RM1,102.5 (instead of RM1,100) at the end of the second year because the interest is now calculated based on your new, increased balance. That is, 5% x RM1,050 instead of RM1,000. This gives you an interest earned of RM52.5 instead of RM50.
This continues to snowball over the years and speeds up your earning journey!
As the table shows, by depositing only RM1,000, you can unleash the power of compound interest to earn an extra RM628.89 by the end of year 10. That’s more than half of what you put in. Just imagine how much you could earn if you continued to make deposits every month or if you patiently waited 40 years to withdraw your money. In fact, that’s how the EPF (with a rate of 5.2% for 2020) works!
How to Make the Most of Compound Interest
A few factors determine how much compound interest you can earn.
- Money Invested
The more you invest and have in your account, the more interest you earn.
- Interest Rate
The higher the interest rate, the faster it takes to grow your money.
- Compound Frequency
This is the number of times per year when the interest is calculated – such as daily, monthly, or annually.
Because compound interest is calculated based on your latest balance (investment + interest), the more frequent the compounding periods, the more you earn.
Pro Tip: Look for investment avenues that give you daily interest!
The longer your money sits in the account, the greater the return.
So if you want to withdraw your money and #treatyourself when you’re 60, investing now, as opposed to in 10 years, will give you a lot more to spend.
As you can see, you can earn an extra RM27,180.47 (RM60,399.89 – RM33,219.42) just by investing 10 years earlier!
Here’s Another Example.
If you start with an initial investment of RM1,000 and commit to adding RM1,000 to it every month (with an annual interest rate of 5%)…
This is why it is important to start as early as possible. No matter your age, the best time to start is now.
How to Start Growing Your Money Today
By now, you’re probably all excited and ready to experience the powers of compound interest for yourself. That’s great!
So how can you start earning compound interest?
There are several ways – such as moving your money into savings accounts, fixed deposits, your EPF, and money market funds.
Versa is a digital cash management platform that gives you the chance to tap into a money market fund, where your money can earn an interest of up to 2.4% per year. That’s similar to the rate you’ll get from a fixed deposit, but Versa gives you the flexibility to withdraw anytime. And, you can earn daily interest!
So, how will you start making the magic of compound interest work for you?