Benjamin Franklin once described compound interest in this way: “Money makes money. And the money that money makes, makes money.”
To further drive the point even from beyond the grave, the American founding father famously bequeathed $5,000 each to his beloved cities of Boston and Philadelphia when he died in 1790. Each city used its endowment for a conditional fund that would be used for 200 years. By 1990, Boston’s fund had grown to $5 million and Philadelphia’s became a more modest yet still substantial $2 million. In all that time, the funds were also used to finance countless worthy causes, highlighting the positive impact you can make by harnessing compound interest.
Fortunately, modern mainstream savings and investment products available to Filipino consumers operate under a compound interest framework. This means that you have the power of compound interest readily available to you. However, as with any worthwhile pursuit, things can be slightly more complicated than they initially seem. As part of our Finance tips section, let’s explore how you can best make your money make even more money the way Benjamin Franklin described:
1. Choose High-Yield Savings Accounts
Before you do anything more complicated, look for a savings bank account with higher-than-usual market interest rates. Because of how compound interest works, even a small increase in interest can significantly boost your savings accounts’ earnings over time.
In the Philippines, digital banks like Maya are currently offering some of the highest interest rates available to consumers—often several times the prevailing rates at traditional banks. For instance, the Maya Savings product offers up to a 15% per year interest rate—significantly more than competing digital and traditional banks. Putting your initial cash in these funds means they will grow much faster, putting you on the path to financial stability years ahead of time.
2. Educate Yourself About Personal Finance
Even as you save and grow your money, you must continuously educate yourself about personal finance, investment strategies, and incoming market trends. That said, you want to prioritize learning about tried and tested concepts rather than unproven ideas that seem a bit too good to be true. While you can try taking more risks later on, it’s wiser to focus on building your wealth and knowledge through less risky means at this early stage of growing your wealth. Read this to learn more about how to educate yourself about finance.
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3. Automate Your Savings
Apart from understanding compound interest, the other key to safely building wealth is to be consistent in saving. Fortunately, digital banks make it easy to set up automatic transfers from something like a regular employee payroll account to savings or investment accounts. Typically, all you have to do is set up scheduled transfers using your digital bank’s smartphone app. This way, you can consistently contribute to your savings month after month without having to think about it.
4. Set Specific and Actionable Savings Goals
The point of saving money in a high-interest account is to eventually have more money to spend on things you want. While simply saving money in a high-interest account is good, it can be difficult to stay on track without a specific goal in mind for your earnings.
Thankfully, with services like Maya Personal Goals, for example, you have a more efficient, objective-based way to sustainably build funds. In particular, Maya Personal Goals lets you enjoy a guaranteed high interest rate of 4% p.a. for each goal you set. With a way to methodically keep your eyes on the prize, your fund can more sustainably go towards anything you need, from high-quality medical insurance to a new car.
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5. Diversify Your Investments
Once your initial savings fund is of a decent enough size, you can consider spreading your cash across different investment asset classes such as stocks, bonds, real estate, and commodities. If you have a stronger appetite for risk, you can also look in money markets as well as getting stakes in local businesses. Read this to learn more about diversification.
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6. Consider Time Deposits
Though they’re rarely the most profitable option, time deposits are among the safer ways to guarantee that funds will be available at a given time. What’s more, time deposit accounts offer higher interest rates than regular savings accounts, especially for longer terms. If you’re adamant about not spending your cash, locking in your funds in a time deposit may be the right choice for you.
Maya Time Deposit Plus, in particular, can be a good place to park your money. It offers high interest rates of up to 6% p.a., depending on your chosen tenor, and you can also open up to five accounts simultaneously.
7. Invest in Dividend-Paying Stocks
Though stocks can be individually volatile, a diversified portfolio of dividend-paying stocks can provide regular income as well as potential capital appreciation. Reinvesting your dividends into a high-interest account of your choice can also exponentially compound your returns over time, accelerating the growth of your personal wealth.
8. Regularly Review and Rebalance Your Portfolio
All investments are subject to varying degrees of volatility. Regardless of where you put your money into, it just makes good financial sense to periodically check on things and readjust your portfolio as needed. This way, you’re better able to maintain whatever performance and risk exposure levels you’re aiming for.
The Power of Patience
If it still all seems too simple, that’s because it is. In most instances, earning cash from interest is largely a matter of “time in the market” rather than “timing the market”. After all, the point of it is to make your money work for you. You may struggle to get the ball rolling at first. However, if you have patience, tenacity, and access to a high-interest savings account, over time, your fund may even begin to outperform your initial expectations.
