How Money Can Make More Money
If Warren Buffett were to keep the money he saved in a piggy bank or under his mattress, he would not be the business magnate, investor and philanthropist that he is today.
The basic concept of the rich getting richer is simple: they have the capital (money) to make more money. Saving money may be able to get your foot in, but you need to learn the ways of growing your funds in order to beat the ever-increasing inflation.
Investing your money is not really that difficult. First, you need to decide on how to grow that money. By knowing the “hows” you can easily choose the instrument that can stretch your Ringgit, and be well on your way to become the next Buffett!
1. Interest earned
This is another way of how your money can grow through investments. By putting your money in an investment like shares, you are essentially lending your money to a company at a fluctuating rate.
The interest rate will change depending on various factors, such as the market, the company’s performance and even the overall economy.
Investment vehicles like unit trust, bonds, stocks and REITs, all help you grow your money the same way. The difference is the risk level and rates.
2. Compounding interest
Almost every investor knows the true power of compounding interest. It is simple: when an amount is compounded, it doubles up. For example, two becomes four, four becomes eight, eight becomes 16, and so on, so forth.
Some of the instruments that use the magic of compounding interest are your savings account, Fixed Deposit account, unit trust and bonds.
If you put RM1,000 into a FD account that is offering 4.18% for six months, here is what you get in return.
The popular Malay saying, sedikit-sedikit, lama-lama jadi bukit, definitely applies to the concept of compounding interest.
The difference between compounding interest and interest earned is, if you leave your dividends to be reinvested or if you add on to your investment regularly, you will see your money snowball to an even bigger amount over time.
Time is the best friend of compounding interest. The longer you leave your money to grow, the more you get at the end of the day.
By purchasing shares of a company, you’re entitled to receive a portion of the company’s earnings, known as cash dividends.
Dividends are known to provide better returns compared to interest earnings from bonds, but at a higher risk as the rates of return depend on the company’s performance.
The dividend payout depends on the company management’s discretion, which is usually influenced by the company’s performance.
For example, a profit-making company may choose not to give dividends to its investors despite being profitable, by reinvesting the additional surpluses back into the company in the interest of growth or expansion.
Alternatively, investors are also offered stock dividends instead of the usual cash dividends. For instance, if you hold 100 shares of a company and the company issued a 5% stock dividend, you’ll have 105 shares after the payout.
The benefit of stock dividend is you get the option to either cash out the extra shares, or retain the shares in hopes of higher capital appreciation. However, transaction fees and charges may apply.
Blue chip stocks are often cited as a safe bet and provide the best steady dividend payout, but the purchase price may be too expensive for some.
4. Capital appreciation
If you bought something for RM100 and sold it for RM200 the following year, the extra gain of RM100 is known as capital appreciation.
Capital appreciation is the main reason investors are into property investment in the Klang Valley.
Supply for land is limited, while demand is ever increasing due to the growth of our population and the increasing number of property investors (both local and foreign). This results in the property prices skyrocketing over the past few years.
Growth stocks are also a good avenue to potentially earn huge capital appreciation gains.
Initially, growth stocks may not pay any dividends to investors, but they have really promising potential of generating substantial and sustainable earnings, which make them appreciate faster than the average company within the same industry.
The likelihood of a windfall profit investors could capture is higher, at the price of assuming the risk of such growth companies.
For bonds, the price is inversely related to the interest rate set by the BNM. As a bond holder, you would want the interest rate to decrease, which will then lead to the bond price increasing, and hence a good opportunity to sell and rake in sweet capital appreciation gains.
Just how much can you gain from your investments? With RM1,000, you can get started on your journey to be the next millionaire. Depending on the plan you choose, as well as the amount of risk you’re willing to take, the sky is the limit when it comes to growing your money. Whether you’re a risk-taker or a play-it-safer, there are options to help your nest egg grow. Don’t wait, make your money work for you now.