By Kelly Wong, Licensed Financial Planner.
Imagine we have a crystal ball that can tell us the total income in our lifetime. It may be cool to know that we can have more than we can spend or it may be scary to realise that we will have less than what we wanted. What if everyone could have only a million in their lifetime and it’s given during birth? Would it be the same or different to each individual’s life? I would say to answer this question and do the analysis we would require the skill of financial planning by understanding the basic rules of future’s money.
Given a million today, a person can spend it all on holiday and have nothing left for the future, or a person can buy a property as shelter and have nothing for future. A person also can invest the million, and enjoy the interest of the investment. There are no rules or regulations to tell you which would be the best as everyone have their own life goals and objectives and priorities. Most importantly, let’s understand how interest can affect the value of future money that can help an individual to achieve more in one’s life.
As a simple rule of thumb by using 8% of return of investment, any ringgit that we use today, we are losing ten times of the future value in 30 years. Vice versa, any ringgit that we invest today, it would become 10 times more in value after 30 years. A thousand ringgit spend, it’s actually equivalent of RM10k spend of future money. So before we spend the money, it may help to prioritize if it’s more important to spend now or for future.
For example, one may plan for half a million to be used after 30 years, which means the future money is translated into around RM5m. In conclusion, understanding the time value of money and compound of interest would be helpful in financial planning.