Do you have the habit of treating yourself to a daily latte? Or perhaps you cab daily to work to avoid the peak hour crowds on the train?
It’s easy to indulge on the little luxuries. They don’t cost so much that you feel a huge dent in your pocket, and they make your day feel much better.
But what if we tell you that saving the same small amount every single day can leave you with much more financial happiness in the long run?
What is your $7 really worth?
Well, let’s look at the cost of your daily latte. At a typical café or coffee chain, it’s probably somewhere around $7.
If you were to save this $7 every day, at the end of 30 days, you will have about $210.
That’s $2,555 at the end of 365 days.
Instead of spending that $7 a day on a latte, what if you not only saved it, but also invested it – what can that $7 a day potentially amount to?
What can I do with $2,555 at the end of 1 year?
The responsible, ‘adult’ thing to do will be to save this sum, perhaps for a rainy day later on. But we’re going to show you how you can go one step further and multiply the $2,555 – all by putting it in a specific place and leaving it to grow by itself.
This ‘specific place’ refers to one of several financial instruments, such as stocks and bonds, or even your CPF account.
Let’s illustrate this using your CPF account as an example, since it is something all Singaporeans have in common. Your CPF functions like a compulsory savings system. Each month, both your employer and you contribute specific sums to your CPF accounts based on specific contribution rates.
Information above is accurate as of March 2017
Each of the 3 accounts in your CPF (the Ordinary, Medisave, and Special Accounts) in turn offers its own attractive interest rate, which then compounds to grow your savings with time.
Assuming you consistently save $2,555 at the end of each year, your overall savings will multiply over the course of several years – eventually leaving you with a respectable sum.
Ok, so what does this have to do with my latte?
Basically, if you start saving that $7 each day and investing it consistently, you can accumulate a significant sum of savings by the time you’re 65 years old – enough to make a measurable difference to your retirement savings. All at the cost of a latte a day!
Take a look at an example of how compound interest grows your savings:
above are based on the assumption of a yearly top-up of $2,555 into
the Special Account, with an interest rate of 4% per annum. The
figures above do not take into account any existing sum in the SA and
extra interest of 1% per annum. Find out more information on CPF
interest rates here.
tax relief per calendar year, up to the current Full Retirement Sum
(FRS). Cash top-ups beyond the current FRS will not be eligible for
But wait – here’s what really
makes a difference when you’re using compound interest…
There are two additional things you
need to know that will make all the difference.
Firstly, the younger you are when you
first start investing, the less you have to save each month to reach
your goal, since you have the luxury of time on your side (more time
means more compounding cycles).
Is it possible to have $50,000 in your CPF in 5 years?
Secondly, if you have a higher interest
rate to grow your savings with, you’ll reach your goal earlier. In
the case of your CPF, the Special Account (SA) offers a higher
interest rate than your Ordinary Account (OA).
So if you do the math (or use a
compound interest calculator), you’ll realise that at the end of 20
years, saving $2,555 each year in your SA will earn you at least
$6,000 in interest!
In real world terms, this will
ultimately lead to a significant sum when you hit your 60s, making a
difference to your retirement savings.
(In case you were wondering, you can
further grow your SA in two ways: by making a cash top-up through the
Retirement Sum Topping-Up Scheme,
or by transferring some of your OA savings to your SA – note that
this transfer is irreversible.)
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The purpose of this article is to show
you how a seemingly small financial decision can have the potential
to lead to something much bigger. With a little bit of patience and
commitment, you can easily end up with a sizeable sum of money over
Adulthood is all about planning, and
it’s never too early to start, especially with something as simple
as saving $7 a day. With this knowledge, you can go forth and ‘adult’
by making smarter financial decisions!
Check out the #ICanAdult hashtag and
page for more bite-sized financial tips!