Monday, December 1, 2008

Save $2400 get back $800 = 33% return ?

Someone asked this in a forum ...
Save RM200 a month for 21 years with 'Guarantee' RM 800 interest a year, payable every 3 years at RM 2,400.  
It sounds like saving RM 2,400 a year can get back RM 800 return GUARANTEE - that is 33% rate  !!  Is it a really a good deal ?
I always see this kind of question being asked, the answer is quite simply ... you have to plug in the number and run the analysis.  ( read about that here )

For above example, if you also take back all your saving of RM 50,400 then add together with your RM 2,400 x 21 / 3 = RM 16, 800.  You are getting a total return of RM 67,200 21 years later.

If you assume a FD interest of 2.65%, you will get back MORE THAN the mentioned return above !!!  

And it is not 33% return but only less than 2.65% return !!

Guess what ?  Today's FD rate is at 3% and most likely to rise for the next few years.

Take this rule of thumb with you ...

any kind of insurance guarantee return policy will provide you slightly less than FD return at that point of time !!


imDavidLee said...

Haha..i ask this question in lowyat name there is goolie..
but may i know how u get this 2.65% interest?

Michael Tsen said...

hope you don't mind I use your example, its a very good case study :)

the 2.65% is what I plug in to show the comparison.

I basically use FV formula to calculate the equivalent return.

one old post mention a bit on the formula