Financial Wellbeing GROWING THE NEST Business consultant, Pria Masson, shares how you can build your nest through investments. Last month, I wrote about how you can get started on thinking about building a small nest for yourself with whatever disposable savings you may have. This month, I would like you to convert that discussion into action, by thinking about where you can park the money to give you returns above the basic bank rate – and why you need to do that. The power of compounding One of the most fascinating aspects of investing is the idea of compounding interest. For those of you who may not be clear on the idea, it works on the idea that if you invest 100 today and earn 10 percent on that, if you do not withdraw it, the next cycle you’re investing 110 and earning 10 percent on 110 rather. Does it all seem like very small numbers? Look at the table alongside and think again. Do you still think you should not invest to compound your money? How banks and financial institutions give you an interest at all Bank rates are notoriously the lowest returns you get from any asset class. The reason is simple – low risk, low return. Your money is very secure – unless the economy you’re living and investing in is itself in trouble. How is this achieved? To understand that, lets first step into how banks give you any return. Banks accept money from you, they keep it safe and in turn they generate a small interest from that money by placing that money with the central bank of the specific country. This is liquid, which means, it can be withdrawn any time thereby making it secure. If, on the other hand, you want a higher return, you must sacrifice part of that liquidity and promise not to ask for the money for longer – that brings us to fixed deposits. Even within these, the more you sacrifice (longer duration), the higher your return and lower your liquidity on an immediate basis. These are the basics of how any investment product works – understand this, and you will understand why higher returns means higher risk. 3 years 5 years 10 years 15 years 20 years 2% 106 110 122 135 149 5% 116 128 163 208 265 10% 133 161 259 418 673 12% 140 176 311 547 965 15% 152 201 405 814 1,637 3 years 5 years 10 years 15 years 20 years 2% 6% 10% 22% 35% 49% 5% 16% 28% 63% 108% 165% 10% 33% 61% 159% 318% 573% 12% 40% 76% 211% 447% 865% 15% 52% 101% 305% 714% 1537% commerce Bahrainthismonth.com 78 December 2024
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