START EARLY, and TIME IS ON YOUR SIDE

Start early, and time is on your side
It's embarrassing to say this because it makes me seem money-minded, but I sleep with my financial calculator at my side.
The reason is very simple.
I enjoy playing with figures, and one of my favourite bedtime activities is punching different permutations of numbers into my calculator to work out the number of years it will take for me to fill up my pot of gold, which to me means financial independence.
PAY YOURSELF FIRST
When you sit down to sort out your bills, the first cheque you write should be to yourself. Work out what you can realistically save every month and pay that 'bill' first by depositing the money in the bank or investing it. Then, and only then, pay your other bills. Start with a modest sum and stick to it. Set aside more when your income goes up. If you get a bonus, sock part of it away.
It never fails to amaze me that it is possible to grow a modest sum into a sizeable one simply through the power of compounding.
For instance, do you know that $68 a month invested for annual returns of 8 per cent over 30 years will generate a sum of $102,020? But if your investment horizon is shorter, say, 10 years, you will need a larger monthly sum of $554 invested at the same rate of 8 per cent to generate $102,020.
Consider this: If you start saving at the age of 20, putting away $2,000 a year until you reach 30, and you continue to stay invested without any further input of cash till you turn 63, you will have nearly the same amount of money socked away as a person who also saves $2,000 every year but starts a decade later, between the ages of 30 and 62.
To illustrate this, let's assume Mr A started a yearly investment of $2,000 at age 20 and stayed invested for 10 years, at a rate of return of 6 per cent. Then, from age 30 to 63, he allowed his investment to continue growing at 6 per cent without any further annual inputs of $2,000. At age 63, his investment would total about $191,150.
In contrast, take the case of Mr B, who embarked on a yearly investment of $2,000 only when he turned 30. He must continue putting in $2,000 a year all the way till he turns 62 before the total value of his investment grows to about $192,690.
A handy and easy tool that illustrates the effects of compounding is the Rule of 72.
To work out how long it would take for your investment to double in value, divide 72 by the expected percentage return. With a return of, say, 9 per cent a year, to double your money, you would need eight years, that is, 72 divided by nine.
This means that if you invest $10,000 in an instrument that gives you an annual return of 6 per cent, that sum would double to $20,000 after 12 years.
I've concluded that to make compounding work for you, two things have to be present: a good savings discipline and a long investment time horizon.
Set up a saving routine and stick to it
Let's look at the first one. Without the discipline to save, there can be no surplus for investments.
Not long ago, I ran into a former colleague who complained that she was unable to save every month, after settling her bills and paying for entertainment. It was clear to me what the problem was: She was paying others before she paid herself. Being disciplined about saving includes learning to 'pay yourself first'.
It is not that difficult to make savings your priority. Decide how much you can realistically save by taking into account your monthly liabilities. Start with a modest sum and stick to it. Increase this portion when your income goes up. Don't spend all your year-end bonuses.
Over the years, I have found that most people have trouble saving for the long term. They might be disciplined at the beginning and save for a short time, but then, they throw caution to the wind by blowing all their hard-earned savings away on some big-ticket purchase such as a holiday or a car.
I have money automatically channelled from my pay and deposited into regular savings plans so I have no access to it. After all, if I don't see it, I'm much less likely to spend it.
Financial experts typically advise clients to save 20 per cent of their pay. Learn to distinguish between needs and wants, limit expenditure on depreciating assets such as consumables and live beneath your means. Don't give in to compulsive buying habits and make it a habit to question every purchase.
Start as early as you can
The second factor required to make compounding work for you is a long-time horizon. This refers to the amount of time you have before you actually need to cash in your investments.
Generally, if you have less than one year, your investments should be kept liquid, in savings and money market funds. If you have a medium- to long-term horizon of five to 10 years, your money should be kept in a mix of cash, lower-volatility instruments such as fixed income, and equities.
If you have an even longer horizon, you have enough time on your side to ride out the volatility of investing in equities, so more of your investments could be channelled there, depending on your risk appetite.
This is why it's just good sense to start saving early as well as regularly. In fact, get started as soon as you get a job because you will have more time on your side. Check out regular saving schemes, which include savings plans offered by banks as well as insurance plans. Many unit trusts also let you make regular savings plan contributions from as little as $100 to $200 a month.
We work hard for our money, so let's make sure our money works just as hard for us. Focus on the long term and make time your best ally.
This article was first published in The Sunday Times on May 25, 2008