Debunking Myths 1 – Savings cannot make you rich
Savings can be defined as putting aside some money every month so that consumption can be deferred to a later date. Whenever we talk about savings, it will refer to our savings accounts. Savings take many different forms and to determine whether a vehicle can be classified as savings, it must fall into the following principles.
 Savings must be liquid or easily convertible to cash
 Savings had to be relatively safe
Due to the high cost of living and the amount of materials goods that is available out there, it is now very difficult to save any money. After deducting our household expenses, monthly mortgages, credit cards payments, phone and utility bills, insurance and et al, we will be lucky to be able to scrape through without digging into our savings.
Another problem is instead of saving, most people spent most of their money on things that they can’t afford on credit cards and also purchase things that they don’t need. This is one of the reasons for the current credit crunch that is facing most countries around the world.
Different Savings Plan
A lot of people have the wrong misconception that savings cannot make you rich. But in reality it can make you rich and I will show you with the following tables.
Assumption : Salary and interest rates are fixed throughout the period
Table 1 : Savings of 5 % of Annual Income and 10 % return
Salary  Monthly Savings  Value in 10 years  Value in 20 years  Value in 30 years 
20,000

83.33

17,069.79

63,278.21

188,366.46

30,000

125

25,605.62

94,921.11

282,560.98

40,000

166.67

34,140.49

126,560.20

376,744.21

50,000

208.33

42,675.35

158,199.30

470,927.43

Source :  Mkvicka 
Table 2 : Savings of 10 % of Annual Income and 10 % return
Salary  Monthly Savings  Value in 10 years  Value in 20 years  Value in 30 years 
20,000

166.66

34,139.46

126,566.41

376,732.91

30,000

250

51,211.24

189,842.21

565,121.97

40,000

333.33

68,280.97

253,120.41

753,488.42

50,000

416.66

85,350.71

316,398.61

941,854.87

Source :  Mkvicka  
Power of Compounding
The above plan in Table 1, call for a savings of 5% of your annual income. Say if you are earning $40,000 per annum, 5% of it will be $2000. So your monthly contribution will be $2000/12, which is $166.67. This applies to the rest of the salaries. The above table shows that your savings can be generated into hugh amounts after 20 to 30 years.
A savings of $166.67 per month can gross you the total amount of $125,560.20 and $376,744.21, respectively after a 20 and 30 years period. What happen if you double your savings from 5% to 10%?
Table 2 will show you the difference. A savings of $333.33 per month can gross you the total amount of $253,120.41 and $753,488.42, or double respectively after a 20 and 30 years period.
Remember those figures are based on a fixed income of $40,000 per annum. Due to the effect of inflation, salaries tend to go up over the years. What happen if the salary revised to $60,000 after 10 years. A 10% savings of $60,000 will be $6000/12 = $500 per month and the equation will certainly be different. In the end, your nest egg will be more than 1 million dollars. Who says savings cannot make you rich?
I am sure a lot of folks will be saying this will not work because our banks only pays 35% interest rates. Well even on a 5% interest rate, your compounding effect will also be sizeable if you save 10% of your annual income instead of stipulated 5%.
Another issue is that interest rates of 810% are achievable in emerging economies although you can hardly find such returns in developed economies nowadays. For example banks in Indonesia pays about 79% yield on term deposits and in Australia you probably be able to get about 78% returns. If you invest in money markets, you might be able to add another 12% more on your investments.
Banks in Singapore offers what they call the Foreign Currency accounts which caters for foreign investors and account secrecy will be assured. Ever since the increased scrutiny and pressure by the authorities in America on Swiss Banks to open up their customers portfolio, they had been an upsurge of funds flowing into Singapore. In fact private equity and wealth management is big business in Singapore. A report by the labour department reports that there will be a shortage of about 3000 private equity and wealth managers in Singapore this year.So, in a way in the next few years, Singapore will be the ‘Switzerland of Asia’.
That is the beauty of what we call positive compounding of interest rates, which can be shown by the chart below. Another advantage about using the above Savings Plan to achieve your retirement plan is that you can start at any age. You can start when you are 30,40 or even 50 years old, the only difference is the duration of the plan. If you are 30 years old, then probably you might choose a 2030 years plan and alternatively if you are 50 years old then probably you will go for the 1020 years plan (if you can last that long).
However compounding can work both ways, meaning it can be positive and negative compounding. You will be amaze what negative compounding can do to your investments or portfolio. Understanding the drawback of negative compounding will help you in your selection of either mutual fund or dividend yield stocks for your retirement portfolio.
On our next posting, we will be addressing the issue on how negative compounding will affect your portfolio and investments. Stay tuned.