Why your savings amount matters more than a high interest rate
When deciding where to invest our money, or simply where to put our savings, what’s the first thing we consider?
For many Singaporeans, the answer is the interest rate (for savings) or the return on investment (ROI) if it’s put in something like an indexed fund.
It’s always sensible to find the highest returns, but many people forget something important: the sheer amount you set aside is more important than being able to get an extra one per cent on interest or returns.
Most of the “retirement battle” is determined by how much you set aside, not your returns.
A story of savings amount versus interest
You might have heard of people who stuff Milo tins or sock drawers with money and have a six-digit retirement fund. Sounds incredible, especially if they’ve never invested a single cent into some financial product to make it work for them.
How does this happen? In the quest for retirement funds, most of the returns is determined by how much you set aside. Here’s an easy way to look at it:
Say you set aside $1,000 a month as savings. You got lucky with a high interest savings account and you can grow it at 1.85 per cent per annum. After diligently saving for 20 years, you would have accumulated around $290,600 with the compounded interest. Not bad!
But let’s consider another scenario. Say you can only find an interest rate of 0.05 per cent per annum (in fact, this is more realistic, and is the typical interest rate in savings accounts today). However, you save a little bit more – you save $1,300 a month, instead of $1,000 per month.
At the end of 20 years, the amount you save, together with the compounded interest, would give you around $303,570. You would save $12,970 more, despite having a much lower interest rate.
As you can see, the amount you set aside is a bigger deciding factor than the interest you’re earning.
Why is this the case?
At the most basic level, think about how interest works: the amount of interest you earn is based on the amount you put in, the principal sum.
Remember, the interest is just a small percentage of your principal, and thus has a more minute impact on your overall wealth. Consider if you set aside $1,000 a month for a retirement fund and earn an eight per cent per annum interest on it. The first year, the interest contributes $80 to your overall wealth, but the principal you set aside contributed $1,000.
With a higher principal sum at $1,300 per month, and considering the compounded interest over the long stretch, you are looking at a higher return. The amount saved is, in casual terms, a much bigger deal.
One last difference: you have better control over how much you save
Most of us have no real control over how much we earn in interest, or through our investments. Interest rates fluctuate all the time, and even the most solid investments can sometimes collapse. We really can’t rely on these factors, to provide for our retirement.
The one factor that we can control is the cash we already have in hand. It’s entirely up to you to decide how little, or how much, you want to save.
And when making a decision for your retirement, always remember: the amount saved > the potential ROI or interest rate.
By all means, go for the highest returns if you can get them; but never lose sight of the fact that your savings count the most.
That said, we know it takes a lot of discipline to set aside a good amount of money to build your retirement fund. At the end of the day, you need to strike a balance and find a bank that offers a good interest rate for your savings to peg onto. Thus, do spend time to research and compare banks, and we’ve got the tools for you to do just that.