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Any Idea How Much You Might Be Losing Out By Not Investing?

Ser Jing - Do You Know Exactly How Much You Might Be Losing Out in Fees for Funds (pic)

Which would you choose? Getting $1 million today or getting $1 million in 5 years? The answer should be quite simple, everyone prefers to have the money now. We know that for a fixed amount, “money now” is worth more than “money later” mainly due to inflation. This is the time value of your money.

However, what if you are given another choice; getting $1 million today or getting $2 million in five years? How can we make a smart decision?

Interest Rates

The question really requires more information. The most important factor to know is the current interest rate environment. If say you choose to have your $1 million today and lock it up in say, a fixed deposit account in a bank, will it be worth more than $2 million in five years’ time?

Future Value

Assuming the annual interest rate at the bank is fixed at 0.35% per year for the next 5 years, we can calculate what we will end up having by compounding it.

Future Value = Present Value x (1+R)^n

Where R is the interest rate and n is the number of years

Putting the figures into the calculation,

Future Value = $1,000,000 x (1.0035)^5

We end up with a future value of $ 1,017,623. Now, it seems waiting for the $2 million five years later sounds much better, doesn’t it?

Rule of 72

However, what if the current interest rate is 20%? As a rule of thumb, in order for us to know how long it will take us to double our money, we can divide the interest rate by 72.

Interest Rate X Number of Years to Double the Money ≈ 72

So if the interest rate is 20%, it will take us roughly 3 years and 7 months to double our money. At an interest rate of 0.35%, it will take us about 205 years.

Foolish Bottom Line

Do not be depressed by the 205 years it might take for you to double your money with an interest rate of 0.35% though (the 0.35% used is in fact, lower than the rates offered by most banks’ fixed deposit accounts). There are plenty of other options out there. For instance, history has showed that $1 million invested in The Straits Times Index (SGX: ^STI) five years ago would have grown to $ 1.7 million now. The same $1 million plonked into the bank DBS Group Holdings (SGX: D05), would have become $2.4 million.

The old cliché “time is money” has some truth in it. Although it is hard to grow your money in the current low interest rate environment with bank deposits, there are still many opportunities available.

And if you compare what your money is earning sitting in a bank’s vault, to what your money might be capable of doing elsewhere, don’t you think it should be time to start investing?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.