For the younger generation, saving for retirement or a rainy day may seem like an unneeded expense, especially in your 20s. Most people put off saving until later in life, but this is possibly the biggest financial mistake you can make.
Starting a savings fund early in life may be a step too far some people. A lot of people don’t save because they believe they just don’t have enough discretionary income. However, you don’t have to be on a six-figure salary to start saving. Even if it’s as little as £10 a month, or £2.50 a week, starting a savings fund as early as possible can transform your financial position over the long-term.
Time is of the essence
When it comes to long-term savings goals, time is probably the best ‘asset class’ an investor has available to them. Time and the benefits of compounding shouldn’t be underestimated.
Warren Buffett is now one of the richest people on the planet, but did you know that he made almost all of his current wealth after the age of 60? At the age of 40, Buffett had a net worth of around $25m. But by the age of 60 his net wealth had grown to $3.8bn. By the age of 70, Buffett’s wealth had reached around $30bn. And today, 15 years later, it stands approximately $66bn.
Buffett understood that the process of compounding can create massive wealth over the long-term, especially if you start at a young age. And the great thing is, you don’t have to be an investment genius to replicate at least some of his success.
Slow and steady wins the race
A couple of years ago, Forbes magazine published an illustration of how compounding and starting saving early can affect your long-term wealth.
The illustration covered a period of 40 years, from 1 January, 1973, to 31 December, 2012. There were four saving scenarios laid out — in each scenario $1,000 was invested every month in a 60/40 stock/bond portfolio. The returns were calculated based on actual market returns of the S&P 500 and Barclays Aggregate Bond Index.
Scenario one saw the saver put away $1,000 a month for 20 years to December 1992. Scenario two calculated returns based on a saver putting away $1,000 a month for 30 years to December 2002. Scenario three was the longest study, covering 40 years of saving from 1973 to 2012. And the last scenario covered a period of 20 years from January 1993 to December 2012.
Unsurprisingly, the third scenario saw the best returns for the investor. $480,000 was invested and at the end of the study, the value of the portfolio was just over $5 million. In study four, $240,000 was invested over 20 years, but this only produced a total return of $407,000. Study one saw $240,000 invested over two decades for a return of $1.1 million and study two saw $360,000 invested over three decades for a final value of $2.6 million.
Summary
So overall, while saving £1,000 a month may be an unrealistic goal for most people, it’s very important to understand how, given enough time, the power of compounding can truly transform your savings and investing success.