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Highlighting the importance of thinking ahead

Posted on April 7, 2013, Sunday

INCREASING PRICES: HwangIM believes that things are getting expensive and the rising cost of living may have reached a point where what we earn does not go very far. — Reuters photo

KUCHING: Things are getting expensive and the rising cost of living has reached a point where what we earn does not go very far.

For example, a loaf of bread cost more than twice of what it did about ten years ago and the price of gold has almost doubled in less than three years, whilst our salaries have remained somewhat flattish.

If only we can turn back the clock, what would you have done in hindsight? Hwang Investment Management Bhd (HwangIM) outlines a scenario to highlight how important it is to think ahead and plan for your future.

Home-grown wisdom

“Since we were little, most of us have been bombarded with anec­dotes and pearls of wisdom on the importance of saving money.

“Truth is, the concern of the possibility that any one of us will need a large chunk of it on that proverbial rainy day is very real and justified,” HwangIM said.

“Whilst it is never too late to start, our commitments as we age means less will be put aside into savings.

“Commitment ranging from saving for your wedding, down payment for a house or car, chil­dren’s education, parents’ medi­cal bills, well-deserved vacations and for some, for retirement, will be among the many justifications for not saving more.

“For that reason, many will shy from thinking of alternatives to making your money work harder for you.

“Is saving alone enough to help build sufficient funds for retire­ment? The answer is a straight up no.

Here are some calculations done on putting money away in a general savings account versus investing.”

The power of compounding

As a scenario, HwangIM put forth a scenario: “Jessica began investing at the age of 26 with monthly sum of RM300 for 30 years.

Assume her investment pays an annualised return of eight per cent per annum for 30 years.

Her investment would have grown to RM460,000 by the end of the period,” it explained.

“However, should Jessica de­cided to invest five years later at age 30 with the same amount of monthly sum for over 25 years till retirement and assume her invest­ment pays her an annualised eight per cent, her total sum would only total up to RM294,000, almost 40 per cent less that RM460,000.”

“From the graphs, we can see the difference five years has made.

“The compounding effect ampli­fies the growth of the investment to Jessica’s benefit.”

Chart shows difference between 25 and 30 years of compounded savings (SOURCE: HwangIM)

Why invest?

HwangIM noted that the act of investing is the proactive use of money to make a gain.

The most apparent benefit of investing is, done right, invest­ments will not only outperform inflation but allow investors to build personal wealth.

“The most important aspect of investing is to start early to enjoy these benefits:

1. Compounding interest

“Compound interest simply means interest earned on inter­est.

“All you have to do is to con­tinuously reinvest your earnings, invest regularly and grow your base, give more time to your investment and your return will increase enormously.

“The longer you invest, the higher the returns.”

2. Leverage on time while you can

“The earlier you begin invest­ing, the more time you will have to compound your growth.

“This eventually will bring you closer to your financial freedom.”

3. Always be careful with your habits

“Starting to invest early is a discipline and will mean you have less disposable income.

“Maintain this discipline and resist the urge to upgrade and trade up everytime you receive an increment or bonus.”

4. Take some calculated risk

“Not everyone gets their in­vestment options correct the first time.

“But making wise and informed decisions early will allow you to reap the benefits few years on.

“As world renowned invest­ment expert Warren Buffet wisely says “Rule no 1: Never lose money. Rule no 2: Never forget rule no 1.”

5. Find a trusted, original part­ner and keep learning from the best

“Investing is not an easy proc­ess and it is a long journey.

“Therefore, you need to engage a qualified Financial Planner with a proven track record, who will be able to advise you on the kind of products and plans that could fit your situation, lifestyle and goals.

“Engage in one that you can trust especially since he or she will be responsible for planning out your financial future.

“Talk to a trusted investment house or get recommendation from friends.

“In addition to investing early, you need to have consistency, discipline and commitment.

“Investment carries risks but takes heart, and forge on.”

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