If you haven’t read my previous post of the same title, please do so here. This is a follow-up to it. Many thanks for those who answered.
In the short story told in my previous blog post, I had used an interest rate of 2.5%. In truth, the interest rate was more like 1.88%, and the amount was in fact closer to $20,000! Nevertheless, the interest rate isn’t the key. I had used 2.5% for a very specific reason.
The eagle-eyed amongst you might have sensed a slight similarity between my short story and a certain issue many Singaporeans hold very dear to their heart.
Once Upon A Time ..
In an ill-fated discussion about the role of CPF in HDB housing, the topic of accrued interest crept up and needless to say, it all went downhill from there.
You see, I hold a rather neutral view on this issue, and I have tried putting myself in both perspectives. Still, it was exasperating not being able to get the other party to see what I see.
Since that fateful encounter, I managed to come up with this short story (based on a real-life example!), that I can use whenever a similar situation comes up.
Short Story Version 2.0
“Old Me” had $10,000 earmarked for retirement sitting in a high interest (CPF ordinary) account earning 2.5% each year. “Young Me” borrowed the money from “Old Me” so that “Young Me” could pay the downpayment for a new apartment.
“Young Me” can foresee that cash is going to be tight during the first couple of years. Therefore, “Young Me” told “Old Me” that the money will eventually be returned in 5 years time.
Compounding 2.5% Interest In Account
This was what “Old Me” bank account would have looked like if the money was left untouched.
10000.00 (end of yr 0) – Magic of compounding starts ..
10250.00 (end of yr 1)
10506.25 (end of yr 2)
10768.90 (end of yr 3)
11038.12 (end of yr 4)
11314.07 (end of yr 5) – Instead of S$11,250 there is an extra $64!
The 5th year approaches and “Young Me” is selling the apartment. “Old Me”, being the super nice guy, insists that both of them are in fact one and the same, and the loan should be interest free. “Old Me” says that he doesn’t need the money now, anyway.
“Young Me” insisted on repaying the money with compounded interest, seeing how much the apartment has since appreciated in price. Life after retirement is increasingly expensive in Singapore and costs can only go up. Thus, “Young Me” would like to give back to “Old Me” what is rightfully his to begin with.
If you were in “Young Me” shoes, would you return $10,000 or $11,314?
Has Your Answer Changed?
Granted, this isn’t exactly a perfect, apple-to-apple comparison but I would like to think it has gotten me out of a number of sticky chit-chat sessions. The shifting goal-posts is another topic for another time, if I ever get there.
Hey, at least I tried.
I see both sides of the coin. Again, I have no interest in arguing, convincing, or justifying anyone/anything here.
Haze is bad – drink more water everyone! Chill and surf net at home!
More Than Index Investing
Be notified of new blog posts right from your inbox!
All you need to do is subscribe 😉