The survey, conducted by Nielsen and commissioned by NTUC Income, interviewed residents across different age groups to assess their perspective on savings. One of the more interesting questions we observed was that whether interviewees aged 25-35 were willing to save $300 per month to get $1 million by 65 years old. 86% of them responded yes, which is not surprising given how the question is phrased.
However, is it truly possible to save $1,000,000 with $300 per month? We here at fundMyLife are suckers for maths. And validating maths is one of our many specialities. This includes watching paint dry, shadow puppetry, and papier mache.
Let’s give it a go shall we? Assuming we have a friend, John, who is currently 25 years old. Here are the conditions:
1) John starts saving $300/month for 40 years, until 65
2) And, for assumption’s sake, no inflation
A naive calculation would reveal that at the end of those 40 years he would have saved:
Wait a minute, that’s kinda off. Perhaps some readers might have realised this calculation is not a good assessment because it ignores compound interest rate. Fair point – we thus add another condition:
3) An arbitrarily generous savings account compound interest rate of 2.00%* 4) Interest compounds at the start of every year
How does this check out? This is an instance where the interest rate compounds yearly/monthly (depending on the policy, really) with a steady amount of monthly contribution. The maths is a little complicated…but for those who are interested, the following equation applies:
Where P is the principal amount (the first payment), Y (number of years), r (interest rate), c (monthly contribution).
But of course, we use our trusty calculator and plot out the numbers for John to see how much money he’d have at retirement at 2% interest:
Wow! John would have had only $218,096 in his account after 40 years by the time he reaches retirement. That’s almost twice of what he has if he only kept it in a tin under his bed, i.e. no interest rate. But that’s only a quarter of a million. I think he can do better by choosing a better bank that offers, say, 5%.
No way! At 5%, John will get $436,890 at the end of his retirement. It is double of the amount at 2%! That said, it’s still pretty far away from that $1 million. Let’s try to increase it again to 7%, shall we?
Omg what. Even at 7% compound interest we’re still having trouble? Stay with me and don’t leave, dear reader!!! Let’s give this ONE MORE TRY at 8%!
Finally, John reaches close to $1 million by retirement, after 40 years.
That’s all folks!
We hope you guys are impressed by how much a difference of 1% can make. It can mean between having close to $800,000 and $1,000,000. If that’s not mind-blowing, we don’t know what is. That’s the power of compound interest, my dear readers – underestimate them you should not!!!
Unfortunately, to the best of our knowledge there are no saving accounts of such magnificence at the moment. Ultimately, while the spirit is willing, the maths is not. That said, please do not despair!!! There are quite a few variables in the equation, e.g., monthly contribution amount, length of time spent saving, etc.
With healthy spending habits, constant planning, strict discipline, and the right investment products (which we will discuss in the following articles), you too will be able to achieve that amount. As the Chinese proverb goes: “The best time to plant a tree was 20 years ago. The second best time is now”.
Stay tuned for more articles and like us on our page! In addition, if you have burning questions that you want to ask, why not ask us on our platform? We guarantee you that our carefully curated financial advisers will be able to answer any questions that you might have 😀