Money & saving

WONG To Yeung (Leo)

WONG Ka Wang (Kelvin)

LAI Chung Yin (Roy)

When you were young …

Did you save? How did you save? Why did you save?

What are we going to do?

How to calculate interest? MPF scheme Comparison between different saving

methods

Saving in a bank

Saving account Advantage

- safe- convenient- earn interest

What is interest?

Reward for your saving Interest rate

expressed in per annum rate

1.Simple interest

E.g.1If you save $100 into the bank at 1% pa for 2 years, theninterest = 100*1%*2=$2amount = 100+2 = $102

2.Compound interest

E.g. 2If you save $100 into the bank at 1% pa for 2 years, compounded yearly, thenamount = 100*(1+1%)2 = $102 .01 interest = 102.01-100 =$2.01 More interest!!!

Make a guess….

You have won the sixth prize of Mark Six

$320

How much will you have saved, if …..1, compounded monthly at 2% pa2, save it for 30 year

Answer

$582.8 Almost double

Do you think it is large?

How about this…?

Suppose you will win the sixth prize of Mark Six EVERY months in the coming 30 year

How much will you have saved, if …..1, compounded monthly at 2% pa2, save it for 30 year

How to calculate?

Amount accumulated by 1st sixth prize= $320*(1+2%/12)30*12

Amount accumulated by 2nd sixth prize= $320*(1+2%/12)30*12-1

Amount accumulated by 3rd sixth prize= $320*(1+2%/12)30*12-2

…..

How to calculate?

Amount accumulated by last sixth prize= $320*(1+2%/12)

Total amount accumulated= 320*(1+2%/12)30*12 + 320*(1+2%/12)30*12-1 +…+320 *(1+2%/12) =$157935

Big or small???

Total interest = 157935 – 320*30*12

= $42735

About 37% of the principle

What is MPF?

Mandatory Provident Fund Launched in 2000 Coverage:

- employee OR self-employed- aged 18 to 65- living and working in HK

Monitored by MPFA

How MPF works?

Regular contributionfor retirement

Max = $20,000Min = $5,000

How MPF works?

Five types of funds:1, Money market fund2, Guaranteed fund3, Bond fund4, Mixed assets fund5, Equity fund

Reality

Inflationgeneral increase in price levelmeasured by inflation rate

management fee

Include the reality Recent annual inflation rate = 0.17% Average monthly management fee = 1.81% Annual rate of return=10% Monthly contribution = $1000 Working for 35 years

So, monthly effective interest rate = (10%/12)(1-0.17%)(1-1.81%)= 0.8168590%

Include the reality

Amount that you can get when you retire= $3,637,675 (homework!!)

How about if we only save for 20 years?Amount that you can get when you retire= $746, 231 (homework!!)

Conclusion: it’s never too early to start!

$6000 cash: How to spend ?

What you may think of …Lazy and stupid not to save Hardworking and wise to save

4.Saving

Cash – at home Ordinary savings account in bank Investment Insurance

i.Saving – Cash at home

Useful Essential Convenient Easy come easy go

ii.Savings account

HSBC, Heng Sang Bank … < $5000 -> 0%, -$50/month >= $5000 -> 0.001% annual Eg. $6000 -> 10 years

how much will be saved ? Depreciate …

iii.Investment

To choose which stock / bond ? Link:

http://hk.myblog.yahoo.com/stevetso/article?mid=373

Gain / loss ? Risk - Fluctuation in market High risk - high return

iv.Endowment Insurance

5, 10, 20 - year scheme Fixed payment – premium (>$1000) Pay annually until maturity day Interest plus dividend each annum Death protection & personal saving

China Life Insurance5-Year Treasure Insurance Plan

No investment, no return

wealth security Insurance period : 5 years Single premium pa Guaranteed dividend rate :

>2% of single premium

Which is the best ? Suppose HK$100,000 , to save from today

to 13/4/2016 (5 years)… no inflation or currency effect If save at home, still $100,000 If save at bank account,

amount = 100,000(1+0.001%/12)5*12

= $100,005.00

Insurance approach Assume dividend rate = 2% of single

premium, interest rate = 3% pa Single premium = 100,000/5 yr

= $20,000 14/4/11: $20,000 13/4/16: A1 = 20,000(1+3%/12)12(1+2%)

13/4/15: [20,000(1+3%/12)12(1+2%)] (1+3%/12)12

A2 = 20,000(1+2%)[(1+3%/12)12]2

13/4/14: A3 = 20,000(1+2%)[(1+3%/12)12]3

13/4/13: A4 = 20,000(1+2%)[(1+3%/12)12]4

13/4/12: A5 = 20,000(1+2%)[(1+3%/12)12]5

Sum of GS S(n)  =  a (rn-1) / (r-1)

Let r = (1+3%/12)12 = 1.030416 Sum = A5 + … + A1 Sum = 20000(1+2%)r(1+r2+r3++r4)

= 20000(1+2%)r (r5-1) / (r-1)

= $111693.45

Hope you find it useful !

Thank You!

Homework 1, Complete the calculations in slide 19. 2, Could you design a saving plan for

yourself so that you can get $5,000,000 after 30 years? You can use the information in slide 18

Extra: Do you support the government directly giving $6,000 to every HK people? Why?

Online discussion Do you think you are saving enough? Why

or why not? Do you support the introduction of MPF

scheme? Why?