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Discover the benefits of compound interest and why you should start investing now
No matter how hard you studied at school, one thing they didn’t teach you there was how to invest the money that you will now be earning as a working adult.
Along with learning to wake up at 7am every single day and rocking office attire, investing is an important thing you’ll need to master.
The stars have aligned, and you are now at the perfect age to begin investing – no matter what your starting salary is like.
With youth on your side, even a modest amount can grow into a tidy nest egg.
Still not convinced? Let's look at what it means to invest, how investing works to grow your money, and what financial instruments can help you get started as a newbie investor.
Why should you start investing as soon as possible?
You've probably already had your first taste of earning money, whether from your first post-graduation job or through part-time jobs and internships you might have undertaken during your studies.
And with any luck, you would also have experienced the satisfaction of putting aside hard-earned money as savings. In fact, placing your savings in and crediting your salary to a high-interest savings account such as the OCBC 360 Account would enable you to earn healthier interest rates on that hard-earned cash.
However, saving all your money by stowing it away in a bank account is not a very efficient way to become wealthy!
The effect of inflation on your money
When money remains in a savings account that is paying little or no interest, its value gets eroded due to inflation.
Over time, inflation causes prices to rise. The price of a bowl of fishball noodles when you were in primary school is very different from what it costs today.
As inflation pushes prices upwards, the value of your money falls. $10 could buy you a lot more when you were in primary school than it can today.
Investing helps you grow your money, so that it not only retains its value over the years, but possibly even grows beyond that.
Compound interest makes your money grow faster
Let's say you invest your money in something that gives you returns of 5% a year.
That means that if you invest $1,000, you'll have $1,050 after one year. You would have earned $50 (5% of $1,000) on your investment.
Suppose you decide to reinvest all your investment proceeds. How much would you expect to earn in the second year? Or after 10 years? If you answered $50 to the first question and $500 to the second, you're wrong.
Thanks to compound interest, you would actually earn more than you think!
Here's how much that $1,000 would have grown after two years if you had reinvested your gains...
You would have $1,102.50.
After 10 years...
You would have $1,628.89
And after 30 years...
You would have $4,321.94.
Reinvesting your investment gains helps your money grow so much faster, given time.
As you can see, it's totally fine to start small so long as you start early!
The earlier you start, the less you need
That also means that the earlier you start investing, the more time your investment has to grow.
Let's look at our $1,000 investment again.
Suppose you invested that amount at the age of 25 at a return of 5%. Your friend, who is the same age as you also decided to invest $1,000 at the same rate of return, but he did so only at age 45. You both reinvest your investment gains.
When both of you reach the age of 55, you will have $4,321.94. But your friend will only have $1,628.89.
You both invested the same amount, but you gave your investment more time to grow.
How can you invest your money?
Investing your money typically requires the purchase of financial instruments or financial products. A financial instrument is a document that has a monetary value, or represents a legally enforceable agreement between two or more parties regarding a right to payment of money.
Here are some investment options that are accessible to young investors:
- Buying stocks or equities in a company means you own a share of the business. When a company grows and becomes more valuable, the value of your stocks rises, too. Some stocks might also offer the possibility of receiving dividends, which will add to your income and can be reinvested. Blue chip stocks enable you to invest in reputable companies.
- With an investment plan, you can invest small amounts regularly rather than buying larger, more costly lot sizes. A Blue Chip Investment Plan lets you gain stock market exposure for as little as S$100 a month, with no lock-in period and no need to buy in fixed lot sizes.
- When you invest in a unit trust, you are buying units in a fund that is being invested by a fund manager in order to obtain returns. Unit trusts enable you to invest in a diversified portfolio of assets that would otherwise be difficult or expensive to access for just S$100 a month.
Exchange Traded Funds (ETFs)
- An ETF tracks an index or some other portfolio of equities, usually on a particular exchange where securities, commodities and other financial instruments are bought and sold. Investing in ETFs lets you diversify your exposure.
- Index funds track indexes that indicate the performance of a particular market. An index fund enables you to trade based on the performance of a designated basket of investments or an entire market, which lets you diversify your risk.
Real Estate Investment Trusts (REITs)
- REITS are companies which own real estate that they derive returns from. Investing in REITs lets you enjoy gains without having to buy property.
Thinking of taking the next step in investing? Click here to learn more and start growing your money.
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