February. The month where New Year’s resolutions are either dead or you have started to see early results of your commitments.
Hopefully it is the latter.
So, what about your financial goals for this year? Is debt down? Is your bank balance looking a little better than before? Whatever the case may be, the following will either shock you into action or keep you on track and motivate you to keep going.
Let’s look at the cost of delaying the start of a savings goal.
Meet Simone and Charlie
Simone and Charlie are both 25. They have both started similar jobs, with similar pay, after graduating from university.
Simone decides to start saving $200 a month from the age of 25.
Charlie waits 10 years and starts saving $200 a month from the age of 35.
Assuming the same net return* of 6% pa, Charlies is going to be an incredible $204,000 worse off than Simone when they both reach age 65.
What is even more shocking is that at age 65, Simone is going to be earning just under $24,000 a year from her savings portfolio, whereas Charlie is only going to be generating $12,000. Because Simone started 10 years earlier, she is going to almost double the income available to her when she retires.
How is this even possible?
Basically speaking – it is the power of compound interest. Over time, compound interest is what makes your financial assets start to really boom. Simone contributes $2,400 pa, for 40 years. But the real magic happens when she reaches age 35. After 10 years of contributions, and accumulated interest, her annual interest exceeds her contribution. Have a look;
For every year after 35, Simone’s assets are generating more interest than she is contributing. And this happens every year for 30 more years.
Comparably, Charlie only realises the benefit of compounding interest when he reaches 45, unsurprisingly, 10 years after he starts saving. This however means he only has 20 years remaining to benefit from compounding interest.
So, does this mean that if I’m over 25, I have no chance to reach my savings Goals?
Not at all. The point above illustrates the impact time has on your savings outcomes. There are a number of options for savers, such as increasing monthly contributions, using different investments, or utilising productive debt.
Any number of strategies can help you reach your goals, whether it be to save for retirement, save for a house or pay off a mortgage.
Want to get started today?
*Assumptions. Net after fees and tax returns is 6% pa. Annual returns are reinvested into the portfolio. Annual Contributions of $2,400 per annum.
The Case Study is illustrative only and is not an estimate of the investment returns you will receive or fees and costs you will incur.