The Wonder of Compound Interest on CNY Lucky Money

[The ultimate retirement guide: Level Two]

Albert Einstein once famously said that compound interest is the 8th wonder of the world. And time is the critical factor for compound interest to work its wonder. While you may have heard of the “compound interest effect”, are you equipped with the right methods and knowledge to benefit from it?

Compound interest effect refers to the process whereby interest is credited to an existing principal amount as well as to the interest due. The amount altogether will be reinvested as the new principal for interest calculation.

Snowball your children’s lucky money as their education funds

There is no such thing as retirement for a parent. From the day your baby makes its first cry, you take on this life-long job to always take care of them – that includes planning for their future. Understand the wonder of compound interest saves you much effort in doing so – grow your child’s CNY lucky money with compound interest investment to earn multiplied returns.

Assume your child receives $10 every CNY starting from birth. Compounding this amount at 7% annualized return on investment (ROI), he/she will have earned about $1,086 at the age of 30. Contrarily, in the case of non-compounding interest, he/she will only have earned $625.5, which is 30% less than the former.

MPF registers 4.2% annualized return, outperforming inflation rate

The MPF system, on the other hand, is a familiar instance of long-term investment under the effects of compound interest and dollar-cost averaging. Your monthly MPF contributions and their returns will be automatically added onto the existing assets for reinvestment, growing your retirement fund like a snowball.

The annualized rate of return of the MPF System since its inception, after fees and charges, was 4.2%, which was higher than the annualized inflation rate of 1.8% of the same period*. Assume you are now 30 years old and have $300,000 in your MPF account. With 4.2% annualized rate of return as the basis, 30 years later as you come closer to your retirement, your MPF assets will have grossed to nearly $3.18 million.

The key to maximize your gains from compound interest is time – the earlier you make up your mind to save and invest for your future, the more wealth you will be able to accumulate for your retirement.

While MPF is an important instrument in retirement planning, complementing it with other instruments, such as saving and investment, makes wealth-generation even more efficient. Say you wish to increase your personal saving at a young age, one way to do it is to make monthly voluntary MPF contributions, and let compound interest work its wonder in multiplying your retirement fund.

Reference:

*As of August 2020.
Source: Mandatory Provident Fund Schemes Authority 

Investment involves risks. This information is provided for general reference only.