All you have to do is deposit one penny in a savings account in your own era, and when you arrive at the End of Time, the operation of compound interest means that the fabulous cost of your meal has been paid for. This, many claim, is not merely impossible but clearly insane, which is why the advertising executives of the star system of Bastablon came up with this slogan: "If you've done six impossible things this morning, why not round it off with breakfast at Milliways, the Restaurant at the End of the Universe?"
~ The Hitchhiker’s Guide to the Galaxy, Douglas Adams
The above extract, notwithstanding its fantastical context, certainly inspires one to be assiduous in saving up. But since nobody has yet to find the way to the End of Time, I took a down-to-earth approach by attending a talk on retirement planning organised by the Central Provident Fund (CPF).
The highlight of the talk was a Mr Loo, a guest speaker who shared how he uses the CPF Special Account to accumulate wealth.
Mr Loo warmed up the crowd by taking a poll on who was sure of accumulating one million dollars in his or her lifetime. There were a few optimistic people in the audience, judging from the number of raised hands. Fast forward to the end of his segment, Mr Loo repeated the poll. This time, almost all hands were up. So what secret did Mr Loo reveal to inspire such confidence in just thirty minutes?
The secret, it turns out, is to save as much as possible in one’s Special Account (SA) as early as possible. Going by the Rule of 72, the number of years it takes to double a sum of money is 72 divided by the annual interest rate at which the sum of money is growing. Assuming an annual interest rate of 4% (the current interest rate of the SA), it takes 72 ÷ 4 = 18 years to double a sum of money. And how does this figure in the route to becoming a millionaire?
If a couple manages to save about $120,000 each in their respective SAs by the age of 30, this sum of money will have gone through 2 cycles of 18 years by the time they reach 65 years old.
First 18 years (from age 30 to 47): $120,000 x 2 = $240,000
Second 18 years (from age 48 to 65): $240,000 x 2 = $480,000
Combined with the extra 1% that the CPF pays on the first $60,000 and another 1% on the first $30,000 for those aged 55 and above, each spouse will have more than half a million dollars in the SA at 65 years old. Okay, to be more exact, Mr Loo should have said “co-millionaires with your spouse”.
Mr Loo also shared that he has even roped his children into saving in their own SA’s. Assuming a child depositing $1 into his or her SA at the age of 12, this $1 deposit will have become $8 when he or she reaches 65 years old! Mr Loo uses this fact to teach his children to spend their money prudently, for every dollar that they spend now is eight dollars that they forgo in future! There are several interviews done with Mr Loo in the media. If you would like to find out more, click here.
The talk, besides opening my eyes to fantastical power of compounding, provided ideas for the maths worksheets on Percentage.
Below is an extract from a Joyous Learning lesson on interest. It's more than maths; it's financial literacy as well!
Extract from Joyous Learning Primary 6 (Mad Maths) lesson on Percentage
Rule of 72
The Rule of 72 is a handy tool to calculate the approximate number of years need for a principal sum (in case you’ve forgotten, this is the original sum of money deposited in an account) to double itself at a given interest rate (and this is the rate in percentage that the bank pays you for every year you leave the principal sum in your bank account).
The rule is this: take 72 (hence the name of this rule) divided by the interest rate, and the answer will be roughly the number of years it takes for the principal sum to double itself. Of course, this is assuming the principal sum together with all the interest is left untouched in the bank account during this number of years.
Currently, the Central Provident Fund (CPF) pays 4% interest to money deposited in the Special Account (SA). Not sure what CPF and SA are? A good topic to check with your parents over mealtimes but for now, treat the CPF as something like a bank and the SA as something like a bank account.
Using the Rule of 72, 72 ÷ 4 = 18, we will know it takes about 18 years for, say, $100 in the CPF SA to become $200. And if this $200 is left in the SA for another 18 years, it will become $400. And if this $400 is left in the SA for yet another 18 years, it will become $800. 18 years x 3 = 56 years; this means that if you deposit $1 into your SA now, it will become $8 (assuming the interest rate remains at 4%) when you are about 66 years old!
By the way, did you know you can have your own CPF account, including the Special Account, from the day you are born? Some of your peers have already started depositing money into their Special Account. So, instead of spending your pocket money on treats today, you might wish to start saving for tomorrow…
Complete the table below using the Rule of 72. (Answers have been filled in for this example)
Compound interest is the eighth wonder in the world.
He who understands it, earns it … he who doesn’t, pays it.
If you'd like to read more of such articles, click the share button below so we know you liked this!