Saving Money is a Matter of Multiplication

I learned about multiplication in Hong Kong when I was 4 years old, I think. It looks like this:

 

…. and then I used to have exams at school every week, closed book. I hated it.

Now at mid-30s, I am beginning to understand the power of simple multiplication. It is the secret behind great leadership, successful business, and wealth. This article focuses on the wealth part.

From my previous article, I mentioned that one doesn’t have to generate a lot of income to become millionaires. The real key, rather, is saving. It bears repeating: saving is the key to become a millionaire. But why?

The answer is compound interest. Look at the chart below:

 

In this example, we have $1,000 in savings. If we just leave that under the mattress, it will stay at $1,000, 20 years later (blue area).  But, if we put it into an investment account that grows an average of 10% a month, it will become $7,000 by doing absolutely nothing (green area). Notice that between year 19 and 20, it grew by $1000 in the span of just 1 year, but it took the first 4 years (year 0 to 4) to get to that same amount.

How can this be? What makes the graph look like that? That’s what compound interest does – it takes on what you have right now, and keeps on multiplying, however small. The mathematical equation of a 10% increase is  *.10. The percentage amount is not the key – it’s the multiplication part. All we need to do is to have a large number and multiply that by .10, and we’ll get a large increase, as opposed to a small number. Let’s look at this again:

• $1,000 savings. 10% increase is $100. Total is $1,100.00
• $10,000 savings. 10% increase is $1,000. Total is $11,000.00
• $100,000 savings. 10% increase is $10,000. Total is $110,000.00

So what happens in 20 years? Look at the graph above once more. Instead of $1,000 savings, we have $10,000 savings. In 20 years, it becomes $70,000. Again, by doing absolutely nothing.

Same thing with $100,000 savings. $700,000 in 20 years. $1 million savings becomes $7 million in 20 years. By doing nothing. Just watch it grow, like a small, fragile plant to a giant, indestructible tree.

I understand that this article is very dry and boring. But when there’s 69% of Americans who have less than $1000 in savings, I feel that financial literacy is important to bring long-term happiness. In addition, it’s not recommended to only rely on Social Security since it’s not designed as your only source of income after you retire.

The money will come. Just save early and let compound interest work for you. It’s ok to get rich slowly, and through that journey, the happiness comes from the fact that you did not worry from spending all of the savings away.

~Sam