Young people often ask financial planners why they should start investing at 30 if they have 30 years to go until their retirement age. They argue that if they start at 40, they can make things work.
Unfortunately, the reality is that it may only be 10 years, but those 10 years of lost growth can often never be made up. No matter how much you intend to invest from the age of 40 onwards, you will not be able to make up for the 10 years of lost time. Often this will result in working far beyond your intended retirement age, because you have lost out twice.
You have not only lost 10 years’ worth of contributions, you have also forgone 10 years of compounding growth – or growth on growth. This is what is nearly impossible to make up, no matter how hard you try, or how much you are able to put away. You may also have missed out on meeting some of your short-term financial goals such as an overseas holiday, a new car, buying a home, getting married, having kids etc. All of which need to be considered, planned, and saved for.
Achieve short-term goals
Those who start saving and investing from their first pay cheque will be at an advantage when it comes to accomplishing short-term goals. It also creates an essential discipline of paying yourself first. Most importantly, by starting early, you can take advantage of the compounding growth.
No matter how small the contributions are, or how insignificant the growth may seem, after years of saving, these small amounts add up quite quickly, and you also start to reap the benefit of compounding growth.
When you think about the power of compounding, think about this example:
Assume you receive and set aside in your piggy bank R1 on the day you are born, and that at every birthday you receive double the amount of money you received the previous year.
By the time you turn 10 you would have over R1 000.
Fast forward 10 years to your 20th birthday and you would have over R1 000 000. Although it is unrealistic to assume you can double your savings every year (you would get something far more conservative), I have used these numbers for illustration purposes as they are easy to follow.
The point of the example is to illustrate how compounding growth gains momentum.
Growing over time
I often look back on my own investments when thinking about the benefits of compounding growth. When I started working, I was required to contribute towards a pension fund through my employer. I started by contributing the minimum amount required and was pleasantly surprised that after four years I had a pension fund of more than R100 000.
When I left my first employer, I chose to preserve my pension fund. I was no longer able to contribute toward this preservation fund and the portfolio was “left” to grow. That was 13 years ago. Today the value of that preservation fund is more than R350 000. Remember, I have made no contributions towards this investment in the last 13 years, but it is now worth 3.5 times what it was worth 13 years ago, showing the true value of compounding growth.
Start early, no matter how small
Now that we can visualise the effect compounding can have on our lives, it’s easy to see why we need to start saving early, no amount is too small to start with. If you delay saving, you will have a lot of catching up to do in the later stages of life when you should be enjoying yourself.
Do not delay, take control, start saving today and don’t stop! After all, according to Albert Einstein: “Compound Interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it”.
Tarryn Jansen van Rensburg is a Certified Financial Planner with Fiscal Private Client Services
