In my last post, I talked about the power and the formula behind compounding interest. Today, I would like to show you a more detailed discussion on compounding interest.
Suppose you are 29 years old and you have a P100,000. You are given the options to save the money in a bank which gives a lower interest in exchange for safekeeping or you have the option to invest it in a higher yielding investment instrument that can give you a higher interest. So what would you choose?
Below is a table that illustrates the power of compounding interest
Age At 4 % Age At 8% Age At 12%
Money doubles every 18 years Money doubles every 9 years Money doubles every 6 years
29 100,000 29 100,000 29 100,000
47 200,000 38 200,000 35 200,000
65 400,000 47 400,000 41 400,000
56 800,000 47 800,000
65 1,600,000 53 1,600,000
59 3,200,000
65 6,400,000
Before we move deeper I would like to give you some idea on investment vehicles that can help you earn this amount of interest. Basically, Bonds offer investors the potential to earn 4%-8% per annum given its conservative nature. Balanced funds which is a mix of bonds and equities offer investors 8%-12% interest per annum while equity funds gives investors 12%-18% interest per annum during good market conditions given its aggressive nature. But be aware that every investment has an inherent risk that comes with it. Typically the higher the investment yield is the higher the risk will be.
Now you see the power of compounding interest. I bet you also noticed the P6M difference between the 4% and 12% investment. Now, let me give you an idea on how banks make money. When a depositor opens an account in a bank, the bank gives the depositor an interest as low as 1% per annum, then what happens next? The moment the depositor leaves the bank, the bank uses that money to lend and to finance other people’s expenses in the form of loans. Yes loans..Credit card loans, housing loan, car loan, etc. and they make 12% or more in each of those loans. Well, let me clarify myself, I am not against the banks. The banks really plays a major part in our economy and believe it or not, even with or without our money in those banks they will still be strong and continuously make money. So what am I telling you all of this? It is because I want you to take charge of your finances and make the most out of your investments. That can simply be achieved with proper money management, informed decisions and good investment vehicles.
If you want to know about investments or any financial planning advice, don’t hesitate to drop a comment. I sure hope this helps.
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