If you’re under the age of 35, you have one of the biggest advantages out there when it comes to planning for eventual financial freedom. TIME
How much you can put away per month is important but that pales in comparison to the role that TIME plays. In other words, the sooner you start, the greater the advantage you’ll have.
WHAT IS COMPOUND INTEREST?
When people think of interest, they often think of debt. But when it comes to saving or investing interest can be your best friend.
Compound interest is interest calculated on the initial capital amount but also on the accumulated interest over the period. Think of it as earning “interest on interest” which has a snowball effect.
Not only are you getting interest on your initial investment, but you are getting interest on top of interest. It’s because of this that your wealth can grow exponentially and why the idea of compounding returns is making your money work for you and not the other way round.
The chart below plots the savings strategies of three investors over a 10-year period.
For practical terms we’ve assumed that each investor earned the same average annual return of 7% consistently, until their 65th birthday. The only difference between these investors is the year when they started contributing to their respective investments. The results are quite astonishing …
Michael saved R1,000 per/month from age 25 till age 35. He then stopped contributed monthly but left the lump sum in his investment account where it continued to accrue at 7% until age 65.
Jennifer held off and only started saving at age 35. She too put away R1,000 per/month from age 35 till age 45. Like Michael, she left the balance in her investment account, where it continued to grow at a rate of 7% until age 65.
Sam didn’t get around to investing until age 45. Still, he invested R1,000 per month for 10 years from age 45 until age 55. He then also left his money to grow at 7% until his 65th birthday.
Michael, Jennifer, and Sam each saved the same amount — R120,000 each — over a 10 year period.
However, their ending balances were extremely different on each of their 65th birthdays.
Michael ‘s end balance was R1,444,969
Jennifer ‘s end balance was R734,549
Sam’s end balance was R373,407
All 3 investors invested the exact same amount, but a 10 and 20 year difference between each investor lead to an end value differential of over R1million. As I’ve eluded to, the magic ingredient that makes compound interest work is time.
The simple fact is that WHEN you start saving well outweighs how much you save. And the best part about compound interest is that it works the same for everyone, whether you have R100 to invest or R1,000,000 to invest. If you don’t believe you can build wealth with just the resources you have right now, keep reading.
There’s an old tale I’ll share with you about the women in Mississippi:
Oseola McCarty was born in Mississippi in 1908. For nearly 75 years, she lived in the same simple house, washing other people’s clothes for a living and putting whatever money she could into savings accounts at local banks.
In 1995, Oseola made national headlines when she donated $150,000 to the University of Southern Mississippi to establish a scholarship fund. “I just figured the money would do a lot more good than it would me,” she said. It soon came out that this lady had managed to amass nearly $250,000 over her lifetime, which in today’s terms would be worth over $410,000 or R6million.
There you have it, the best time to start saving is right NOW. Financial independence is just a few variables away, so start saving and invest it well. Because the sooner you get the wonder of compounding working for you, the sooner you’ll reach your financial goals and dreams.
Albert Einstein — ‘Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.