Eighth wonder of the world - The compound effect

Updated: Dec 29, 2019



The accomplishment of any goals is the progressive accumulation, or compound effect, of small steps taken consistently over time - Darren Hardy

Have you ever had dreams and ideas that you plan to execute but wake up every day going through the same old routine all over again?


How many times have you decided to achieve a six pack abs body but after just exercising for the first few weeks, succumb to your old habits of binge eating and lament at your ever-increasing waistline?


Have you ever wonder why every time you target to save up a certain amount of money by a certain age, but you never seem to hit your target?


Why are all these happening? The reason might be the lack of Consistency.


Rome wasn't built in day. As corny as it sounds, it carries an honest truth. Only actions will beget results. If we want to achieve our dreams like most successful men do, we need to start acting and accumulating knowledge consistently to progressively build our path to success one small step at a time.


Below, I will show you how the concept of consistency can be applied to money - my favourite topic. * Disclaimer: The charts/tables in the following article is of a general nature and intended as a guide only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. With that in mind, let's begin.


According to the Ministry of Manpower (yes appeal to authority), the median gross monthly income from work (Including Employer CPF contribution) of full-time employed residents is S$4,232 in year 2017.

Say out of this monthly income you save S$1000 per month consistently from the day you start working at the age of 25 to your retirement age of 65. Let's see how much you would have saved.

Look! You could be a half-millionaire by the age of 65 just by saving S$1,000 a month under your bed or in your biscuit tin! All thanks to consistency. Do also take note that this is under the assumption that your monthly pay stays at S$4,232 for the rest of your career. (It’s sad if that's the case). Needless to say, you should adjust your savings when your pay increases accordingly.


Heard of the concept of inflation? Do you think that S$480,000 will be enough for your retirement? Let’s look at the chart below that shows the Singapore’s historical inflation rate.

According to Trading Economics, inflation rate in Singapore averaged 2.6% per annum from year 1962 to 2018. If inflation rate remains at 2.6% per annum for the next 40 years, how much do you think a plate of chicken rice that costs S$3.00 today will cost 40 years later? Ready for it... it's S$8.38! What!? (For the math fanatics: S$3.00 x 1.026^40)


Yes. It sounds absurd to pay 8 bucks for a plate of chicken rice from your local hawker centre, but this would be so 40 years down the road. The question surfaces again: Is S$480,000 enough for retirement? According to World Life Expectancy, the average life expectancy of Singaporean at 82.9 years. This means that an average person can expect to live another 18 years after retiring at age 65. The table below estimates the total expenditure required for basic retirement 40 years later.

S$827,928! Oh dear… are we all doomed? Thankfully, Singaporeans have the Central Provident Fund (CPF) scheme to prepare us financially for our retirement. Looking at the table below, the average return of the CPF Ordinary Account (OA) allow us to have just enough for our basic retirement.

It all sounds good but are you willing to spend your retirement life eating cheap chicken rice every day, take economy class flight for overseas travel, take the crowded public transport to commute, queue for public healthcare and scrimp throughout your life? Definitely not me when I am 65.


I like to think of money as little soldiers that you acquire and how you use them is crucial to your conquest (of wealth). Owning an idle army not only bears high opportunity costs but it also depreciates in value. Yes, it's true that some soldiers that you send out for your conquests (investments) can risk dying, but with a clever strategy and prudent deployment, the victory (returns) will be rewarding.


Below are some financial instruments in the market and their average returns that I know of.

Saving your money in different financial instruments can lead to astounding difference in the end results. A passive investor who saved his money in the US S&P 500 regularly (Table item 6), closed his eyes and ride through the financial storms, will have netted S$3,491,008. Comparing that to S$480,000 saved under the bed or in a biscuit tin, that's a whopping 7 times difference after 40 years. Isn’t that mind-blowing? The point is by consistently saving and also apply the right financial tools, the fruit of labour will be much sweeter. The power lies in compound interests and a discipline mindset to save regularly and smartly.


Of course, a pessimist will say, financial instruments with higher returns carries higher risks. For an optimist, he will say no risk, no gain. It's the same argument, but very different mindset. Are you a pessimist or an optimist?


The key is to put in the work to study the financial instruments, implement risk management and strive for consistent returns. Remember, for he who appear like the rest, will disappear like the rest. If you want to be extraordinary, take actions that the others won’t and be smart in life. The above is just one simple case study on money. The benefits of consistency can be applied to other aspects of life too. Just remember to take action today, let the compound effect works its wonder, one step at a time.


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