Should You Start Investing?
From fresh graduates to senior working adults in Malaysia, many of them do not understand the importance to start investing early. Even if some may have started investing, many are misguided or confused by the different information bombarded in the social media and are unsure of what’s the right way to correctly manage and grow their wealth. For example, many investors have foolishly invested their hard earned money in money game operators such as MBI, JJPTR and so many more back then in 2017. It is estimated that there are at least 1 million Malaysians losing up to RM5 Billion in these money game scams in 2017.
One of the main reasons why this is happening in Malaysia could be the lack of financial literacy guidance in our education system. According to an article by New Strait Times, financial literacy among Malaysia youth is getting alarming low that there are about 84,805 Malaysians were declared bankrupt between 2015 and 2019; furthermore people below the age of 34 made up 26 percent of the bankruptcy cases based on report provided by the Insolvency Department.
Why You Should Start Investing Right Now
Time Value of Money
Today, you have 2 options to receive RM10,000 Bonus:
A. Receive RM10,000 now or
B. Receive RM10,000 in 2 years time
Which option would you choose? In plain instinctive, most people would choose to receive the RM10,000 now but have you ever wonder why. The straightforward answer is that inflation has an impact on the time value of money that it decreases the value of a dollar over time. Inflation increases the price of goods and services over time, effectively decreasing the number of goods and services you can buy with a dollar in the future as opposed to a dollar today. For example, an apple costs RM2 today; the same apple could cost RM3 ten years from now due to inflation.
To give you a perspective of Malaysia’s inflation, the Malaysia Consumer Price Index (CPI) measures the percentage change through time in the cost of purchasing a constant basket of goods and services representing the average pattern of purchases made by a particular population group in a specific time period. From the graph below shared from the Department of Statistics Malaysia, it shows that price of goods and services are steadily increasing year on year, reducing your purchasing power of the same dollar you save at your bank account in the future.
The Power of Compound Interest
The great Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
So what’s compound interest? Famous scientist Benjamin Franklin explains how compound interest works as “Your money makes money. And then you make more money on the money your money makes.”
Imagine that you invest RM1,000 this year and you make a 8% annual return on that money. It would mean that you have earned RM80 on your original RM1,000 investment, resulting in total investment value of RM1,080. Let’s say you continue this investment with consistent 8% annual return without incurring any additional investment for the next few years, it would take 9 years to double your initial investment of RM1,000 to RM2,000. If you invest this capital for as long as 30 years, you will multiply your investment by 10 times to about RM10,000.
And this is known as Rule of 72, a simple way to determine how long an investment will take to double given a fixed annual rate of interest. To estimate how many years it will take for the initial investment to duplicate, simple divide 72 by the annual rate of return. For example, you place RM1,000 at the bank fixed deposit at an annual fixed interest rate of 2%, it would take approximately long 36 years ([72/2]=36) to grow to RM2,000.
Better Financial Planning
Starting into investing is like planting a little seed that can grow into a passion, it helps you to develop a healthy financial habit and mindset. With the lack of financial planning, many young adults nowadays have been spending to purchase items that are beyond their financial capability, some even misuse their credit cards or taking up unnecessary loan. This results in forming a dangerous habit of spending future funds for excessive spending, create a never ending debt cycle.
As a good investor, they spend less than what they make, save the extra money to invest to earn interest. And when you start investing, you will start building wealth-building habits, such as being practical and think twice when it comes to large spending and purchases. With this mindset, you are also more likely to meet like minded person with your social circles too. Having a proper financial planning also make sure that you are ready to manage crisis in life in which you need to fork out large sum of money to pull through it.
Financial Freedom
At the age of 28, I have seen some senior working adults that are stuck in a job that they hate but have to stay with it just because they are financially tied up to escape that working environment. By investing at now at young age, you are likely to build up some wealth so that you are able to get certain financial freedom and make financial decision that doesn’t need to come from fear. In Malaysia, most Malaysians retired at an average age of 60, but many of them do not plan ahead of how much funds required to survive after retirement. Most of them withdraw the entire EPF retirement fund and rely solely on this single fund to survive till the rest of the life. But what happens if an emergency happens and requires a large sum of money or the EPF fund depletes faster than it should before you say goodbye to this world?
2 important questions to ask yourself is that how much do you need when you retire and how do you plan to achieve it? iMoney has shared a good example to help you calculate the estimated monthly and yearly expense to derive the retirement fund that you need many years later. Hence, it is always important to plan your investment early to achieve your retirement goals.
With a good financial planning, the wealthy folks do not need to worry on their next paycheck to survive and have the freedom to pursue things they are passionate about. At young age, they make financial plans and save up their earnings to invest in return for an reasonable interest return on their investment. Upon retirement, they have built a considerable large sum of investment portfolio that is generating a consistent monthly income to help cover their monthly expense after retirement. In the case of emergency, proper financial planning has also helped them to pull through it (Will share how to do in the next article). Instead of relying simply just on the EPF retirement fund, the early investment years ago has bear fruit to provide additional retirement passive income to live happily without worry.
For some successful investor, early retirement could be an option to leave the job that you are not happy with if you start investing early in life. Perhaps some of your friends said that they will start investing but never have actually do it, or even only start doing it after retiring. Please don’t be one of them, early retirement is possible only the sooner you start investing.
Final Note
Always start your investing journey early, you can always start small from as low as RM100. It makes a big difference when you start investing since young. The illustration below shows a big difference if you start early at age 30 compared to age 40 when you invest the same amount of investment.
After understanding so many reasons to start investing now, you may be wondering how can I start investing. I will share the different ways of investing in Malaysia, hope you are excited to wait for my next article “How to Start Investing?”.
If you wish to know more, feel free to drop your inquiry below.
