While at the time it may feel like there are better things to do with your money than saving, starting early, even in a small way, can make a big difference. Whether saving for a house or planning for retirement, starting early increases your chances of getting there sooner.
Australians are living longer than ever before, so it’s important to be financially ready for retirement and other changes to your lifestyle along the way. We can help you determine the best strategies to help you achieve your goals, both inside and outside of super. These can be used in the lead up to and during your retirement. One key strategy that can help when saving for anything is starting a regular savings plan early. One of the key reasons for this is the benefits of compounding.
What does “compounding investment returns” mean?
Compounding investment returns occurs when you add (re-invest) the interest, income or dividends from your investments to the original investment. It is the snowball effect of the investment earnings you make in one year making you money in the following years.
For example, if you earn 5% ($50) interest on $1,000 of savings in the first year, in the second year you earn 5% on $1,050, or $52.50. The benefit of compounding over 20 years can be seen in the graph below.
Power of compounding (20 years with 5% interest on $1000).
The benefit of starting a regular savings plan early
Saving on a regular basis and starting this early is a good way to build up a nest egg, and as we have seen the benefit of compounding can help this nest egg grow over time.
Case study
Jack and Jill both earn sufficient money to be able to save $1,000 per year.
Jack saves $1,000 each year for 30 years and puts his money into a savings account earning 5% interest per annum. Jack also takes advantage of the benefits of compounding by re-investing his interest each year. At the end of 30 years, Jack has saved $69,760.
Jill puts off her savings for 10 years, then like Jack, puts $1,000 each year into a savings account at 5% interest per annum. Jill also takes advantage of compounding and re-invests her interest each year. At the end of 20 years, Jill only has $34,719. The difference is illustrated in the graph below.
Regular Savings.
By starting a regular savings plan early and taking advantage of the benefits of compounding, Jack has saved $35,041 more than Jill.
Meet your saving and investing objectives sooner
- Start a savings plan now
- Look to re-invest as much of your interest and earnings as possible
- Adopt a long-term investment view, particularly in the early years of saving for your retirement. The longer your money stays invested, the greater the benefits of compounding.
Seek advice
Contact the team at LA Wealth so we can discuss your current goals and how we can ensure your wealth is in good shape.
