Why Invest Your Money

Why invest your money?

Everyone works to make money to buy our daily necessities and to fulfil our wants.

Investing your money that your have earned may be difficult for those whom are constantly worrying about rising costs of living. Hence, if you are in this category, you should first manage your finance. Budgeting is necessary to reach a better investment standing. For example;

Table 1 : Monthly income of RM3000

Monthly Expenditures	Rough Amount Spent	Percentage of Expenditures
Food	600	20%
Lodging/Rent	600	20%
Travel/Fuel	510	17%
Loans	780	26%
Miscellaneous	510	17%
Total	3000	100%

If you were earning RM3000 monthly and had expenditures as in Table 1, assuming you could save RM300 out of your RM510 allocated for your miscellaneous expenditures, that would come up to a savings of RM300 x 12months = RM3600 each year. 

After 5 years, your total savings would be RM19,774.15.

However, calculating RM3600 x 5 = RM18,000.00. So, where did the additional RM1774.15 come from? Well, that is the 3.15% interest you got if you had kept your monthly savings in an FD account. This 3.15% is added to your yearly savings which compounds over time. Compounding just means your actual savings of RM3600 does not merely add RM3600 yearly but it adds 3.15% yearly on your collective savings for the year.

CORRECT

1st year RM3600 + 3.15% = RM3713.40

2nd year (RM3713.40 + RM3600) + 3.15% = RM7543.77

versus

WRONG

1st year RM3600 + 3.15% = RM3713.40

2nd year RM3713.40 + RM3600 = RM7313.40

[All calculations uses a 1 month FD rate of 3.15% and 2014 inflation rate from Bank Negara Malaysia's website]

Well, if you aren't a maths junky, all you have to know is that your savings if kept at a certain rate (%) over time multiplies into a nice big sum. Hence, if your savings is small, the best way to compensate is to get a higher rate (%). This is called investment.

Anything that you put money into that gives a return is investment. Investments are vital as money if kept at 3.15% in a 1month FD account in Malaysia last year,2014, would have given you a real return of -0.05%. Yes, negative 0.05%!

What is a real return? That is how much your savings can buy you today. Real return is also known as your purchasing power. For example, your returns for 2014 if you kept your RM3600 in a 1 month FD account would have come to RM3713.40 no doubt.

BUT, your actual purchasing power is only RM3420.

The calculation is simple;

Inflation for 2014 was 3.2%, your FD was giving 3.15%,

 Inflation - FD Interest   

  3.20%   -    3.15%         = -0.05% (your real return / purchasing power)

If you feel that things are more expensive today with a similar pay from last year, the above is the explanation why. Inflation has eaten off your returns at 3.2% in 2014.

Back to your savings. The more you save the more you will have IF inflation doesn't undercut your returns. Keeping your savings by investing them is an effort to grow your money. The higher the return (%) the more your savings will be after many years.

Below is a Compound Table. Assuming you have saved RM100,000, the below table indicates the compounded value of RM100,000 invested at 5%, 10% and 15% for 10, 20 and 30 years.

Table 2 - Compound table

	5%	10%	15%
10 Years	RM162,889	RM259,374	RM404,553
20 Years	RM265,382	RM672,748	RM1,636,640
30 Years	RM432,191	RM1,744,930	RM6,621,140

Notice, the difference of every 5% makes a whole lot of difference when kept over longer periods of 10, 20 and 30 years.

Thus, we conclude that investing is the best way to go forward when it comes to savings and managing your money AFTER you have gotten your BUDGET right.

The better you budget your expenses, the more you will have in the future with the help of compounding interest.

Finally, WHERE TO INVEST?  Well, that is basically explained in every other post in this blog. Browse through should you be interested in growing your wealth.

In brief, this blog recommends investing in stocks/shares/business/public companies as when you buy a stock of a company, you become a part owner of that company. Should that company be a company like Nestle, you can be rest assured it'll continue to do well over the next many years & so will your shares that would be worth a lot more than what you paid for.

I hope this post simplifies the First post of this blog entitled;

"Why Invest?" - http://iliveidreamitranscend.blogspot.com/2014/03/investment-malaysia-shares-why-invest.html

This current post "Why Invest Your Money" was at the request of someone who wanted a more simple explanation on investments. As an effort to better upcoming posts, everything will be explained in a more lay and informal manner.

As for the month of April, the stocks in view are,

Oldtown Bhd
- for the longer term,

Bank of Greece (Athens:TELL)
- for the longer term,

Sime Darby Bhd & Air Asia Bhd
- should new listing plans come true.

Until next time, happy budgeting, saving and investing.


[DISCLOSURE: The writer currently owns minority stake in Parkson Holdings Bhd and Oldtown Bhd among the mentioned stocks as of 18/05/2015 under his personal account. JR Capital LLP does NOT own any interest in mentioned stocks as of mentioned date.] 

First published on 28/04/2015.