AsiaLIFE

“Back from the Brink!” and “Record Gains!” have been just two of the headlines that have been touted by the mainstream media in relation to the global financial crisis recently. They are in stark contrast to some of the other headlines we have seen of late – such as “Crash” and ‘Meltdown”. It just goes to show what a difference a few days can make when it comes to dealing with the world economy! It also shows that we are living in uncertain and volatile times when it comes to finance.

While world leaders and their respective finance ministers are tackling the real issues in the economy what should we be doing? The answer is to learn how we can protect ourselves from this inevitable volatility as illustrated by these ever-changing headlines.First up, we need to understand about regular savings plans, compound interest and dollar cost averaging.

Compound Interest

Did you know that if you started saving US$10 per week at the age of 20 – at an interest rate of just 2.5 percent after tax and allowing for inflation – you would have earned US$35,480 by the time you were 60? In reality you would have invested US$20,800 by the time you were 60. But with compound interest that US$20,800 would have earned you an extra US$14,680 in interest over the 40-year period.Had you started saving US$50 per week at the age of 20 by the time you were 60 you would have put away US$104, 000. You would have earned interest of US$73,400 giving you a total of US$177,400. Still with me?

When you save into an account your bank adds interest to your savings at monthly intervals. If you leave your money – including the interest – there and do not make any withdrawals then that money grows and grows. The interest earns interest on the interest. So you are earning interest on the amount you save as well as interest on the interest – compound interest.The longer you save the more you benefit from this compound interest.

It’s the same for shares – but for shares instead of re-investing the interest you re-invest the dividends.If had you invested US$10,000 in the stock market in 1983 – that same US$10,000 would be worth almost US$200,000 at the end of 2007. By comparison – the same amount in bonds would be worth US$77, 558 over the same period of time – and that’s with September 11, the dotcom crash and a number of wars and crises in between.

Savings Plans

Regular savings plans are an excellent way to reduce risk and to benefit from dollar cost averaging. Dollar cost averaging allows an investor to take advantage of the volatility of the share market.By investing a set amount at set intervals you are effectively riding the ups and downs of the stock market. You purchase more units when prices are low and less when prices are high. This reduces the risk of putting a large sum of money into a particular investment at the wrong time. You will also benefit financially from this – hopefully paying a lesser average price for your units or shares.

Those of you who know me well, will realise that I am a big fan of funds. One of the best things you can do right now is set up a regular investment plan to contribute to funds. Like shares, these go up and down and you will benefit by buying more units when the price comes down.So, remember our golden rules of buying for the long term and regularly monitoring our investments. Do not put any money away that you might need at short notice. And to guard against this, set up a regular investment plan. There you have it.While the rest of the world is panicking and the world leaders are trying to sort out the world’s financial problems, try and make this volatile situation work for you by planning. If you plan properly you could possibly end up profiting from all this uncertainty.