Saving and the Impact of Compound Interest
Updated: Sep 10, 2019
Working within financial services makes you aware of the impacts of saving and making your money work for you. It was only recently, however, that I started to focus on my own personal finances and begin saving.
During my childhood, I'd always been encouraged to save money. Be it for new computer games, footballs or any glamorous gadget that became the latest trend, I'd always put money aside. And that, to me, was saving - putting aside money for an end goal. In these cases, the goal was short term (a matter of weeks), but as I grew older, the goals started to extend.
Most people put money aside to buy their first home and for me it was no different. For most individuals, their first home remains a valuable asset in their life and considering the average house price in the South East (£393,384) and London (£623,855)*1, it's easy to see why. Saving a 5% or 10% deposit to meet a bank’s lending requirements feels like such a hard task at the time but once regular deposits are in place, money starts to build up relatively fast. The day eventually comes when you’re ready to purchase a house and the period of saving seems to have flown by. The above examples involve short to medium term saving mechanisms, with the value being used in full to purchase what’s desired. But what about the long term? Retirement saving is no different.
Although we recognise the purpose of saving, many of us fail to realise the impact of long term saving and the effects and benefits that investment planning may provide later. David Allard, Chief Executive Officer of FLM, says “if you save for a child at birth and put (in) £5.50 a day, from 0 to 10 and then stop, it will be worth over £1,000,000 by the time they retire”. To comprehend that, let’s look at the figures in a table:
If we then compare the figures against saving £5.50 a day for 10 years from the age of 20, where you have lost 20 years of compounding interest by starting later, we start to see the impact of compound interest:
Even continuing to contribute £5.50 per day from age 20 until retirement, the final value is considerably lower than the original example taking advantage of the full compound interest potential:
The above examples highlight the impact of saving from an early age and the benefits of compounding growth
*1 – Rightmove 2018 - https://www.rightmove.co.uk/house-prices-in-London.html *2 – The rate of growth required to achieve £1,000,000 at retirement
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