1. Why Saving Alone Isn’t Enough
Putting money in the bank might feel safe, but in reality, leaving your money in a low-interest savings account can erode its value over time due to inflation. Inflation reduces the purchasing power of your money (i.e. the number of things your money can buy) over time. So even if your bank balance stays the same, or grows slowly, the actual amount of what you can buy with that money becomes less.
Example
Let’s say inflation is 3% per year and your bank savings account earns only 0.5% interest per year. If you have $100 today, it might buy you a nice lunch. But in a year, that same lunch will increase by 3% to $103 due to inflation, while your savings will only have grown by 0.5% to $100.50. That means you’ll no longer be able to afford the same lunch with what you have today, i.e. your money has effectively lost 2.5% of its value over the year.
Saving is important for emergencies and short-term goals, but for long-term wealth, your money needs to grow faster than inflation. This is where investing comes in.
2. The Power of Compounding
One of the most powerful forces in wealth building is compound growth, or earning interest on your interest. The earlier you start, the more time compounding has to work.
Example 1:
If you invest HK$1,000 today with 5% annual return:
Notice how the interest earned increases each year and the investment value keeps going up, without you having to do anything? That’s the power of compounding. The longer you stay invested, the more your investment grows year after year.
Example 2:
What happens if you invest HK$1,000 every month for the next 10, 20, 30, 40 years? Let’s compare what happens when your money grows at 0%, 5% or 10% annually, and how compounding really makes a difference over time.
Keeping your money in a bank savings account with little or no interest is essentially the same as getting 0% growth. Comparing this to 5% growth per year, the difference in the early years doesn’t seem too big. After 10 years, earning 5% growth per year would give you about 1.3 times (x) your savings. Not groundbreaking, but not bad either. But over time, compounding really starts to pick up:
- After 20 years: you get about 1.7x your savings
- After 30 years: 2.3x
- After 40 years: 3.1x
That means you get more than triple your savings after 40 years just by contributing HK$1,000 a month consistently and letting your money grow at 5% a year.
Now, let’s see what happens with a 10% annual growth rate:
- After 10 years: you get about 1.7x your savings
- After 20 years: 3.0x
- After 30 years: 5.7x
- After 40 years: 11.6x
Yes, that last number is correct. After 40 years at 10% growth, you could end up with over 11 times (!) the money you saved. That’s the exponential power of compounding: small gains early on, and massive growth over time.
The lesson here is the sooner you start investing, the more time your money has to work for you. For the average person there is no get rich quick scheme, it’s all about time, consistency, and a lot of patience. Earlier on it might not seem like investing is doing much, but give it a few decades and it could completely change your financial future.
Of course, not every investment will generate returns, some may even lose money. These examples are simply to show the potential outcomes of investing. Ultimately, you’re responsible for your own financial decisions, so it’s important to do your research before committing your money to any investments.
3. Passive Income
Passive income is money earned with little to no ongoing effort, or in other words, income that continues even when you’re not actively working for it. There’s no free lunch, so it does require you to put in the money and effort upfront to set up, but the goal is to create a system that generates consistent cashflow in the background with minimal maintenance. Think of it as putting your money, skills, or assets to work so you can free up your time and focus on other things.
Investing is one of the most effective ways to generate passive income, providing a steady return with minimal involvement, and only requiring occasional reviewing and rebalancing. Once you’ve chosen your long-term investments, they can start earning you income in the form of dividends or interest:
Dividends
These are profits you receive from holding shares in companies you own. Some stocks pay dividends regularly, giving you a steady income without needing to sell your investments.
Interest
This is what you earn by putting your money into term deposits and bonds. Think of it as instead of you borrowing money from the bank and paying interest, a bank, corporation or government is borrowing from you, and they pay you interest in return.
Here are a few more passive income ideas to consider:
Rental Income
Buying a property to rent out can generate a steady income stream, but it also comes with high upfront costs and ongoing responsibilities. If you use a mortgage (loan from the bank) to finance the purchase, you must be confident you can keep up with the monthly repayments. If the rental income doesn’t fully cover the mortgage and maintenance costs, you’ll need to make up the shortfall yourself, meaning instead of earning an income, you’re actually spending money, which defeats the purpose. For rental property to truly provide passive income, your rental income must consistently exceed the property payments and expenses.
Selling Digital Products
This involves creating and selling digital products like e-books, templates, or courses online. While it requires upfront time and effort to develop and promote, it can generate ongoing income with little maintenance. However, because it’s relatively easy and low-cost to start, there is a lot of competition, so how successful you become will depend on finding a unique angle or addressing a specific niche that sets you apart.
Affiliate Marketing
Promote products or services online (blogs, social media, YouTube etc) using special referral links that earn you a commission for each sale made through them. This method works best once you’ve built a loyal following who trusts your recommendations and is more likely to buy the products you feature. Similar to selling digital products, the low barrier to entry means many people are already doing it, so it will take time and consistency to stand out and gain traction
Licensing Creative Work
This is best for photographers and designers. You can upload and license your original work (photos, graphics, fonts, etc) on certain platforms and earn a fee (royalty) each time someone downloads or uses your content. The more high-quality, searchable, and in-demand your content is, the more potential you have to build a consistent stream of royalties. It takes effort to build a portfolio that stands out, and you need to regularly add new content and stay on top of trends, but over time can this can become a relatively regular source of income.
Final Tip
No matter how you’re earning passive income, whether it’s through investments, rental properties, digital products, or creative work, it’s best to start small, stay consistent, and choose options that match your skills, goals, and values. Don’t rush to quit your day job right away. Passive income can take time to build, and while it may eventually grow enough to supplement or even replace your main income, keeping a steady paycheck in the meantime helps you stay financially secure as you grow.
DISCLAIMER
None of the above is financial advice, just general information meant to help you learn and think things through. Every investment comes with risks, including the possibility of losing money, so it’s really important to do your own research before making any investment decisions. You are responsible for your own decisions and any investments you make are strictly at your own risk.