The magic of Compounding and a few ideas on saving

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Albert Einstein

You have probably heard the saying: “When you don’t work, your savings will work for you”. There are number of benefits to saving money. In its simplest form some of the benefits can be listed as below:

  • It creates some independene
  • You are not stuck when the rainy days arrive…
  • It allows you to take advantage of good buying opportunities (from cars to properties or businesses – don’t foget cash is king!)
  • You allow for an enjoyable (and perhaps early) retirement
  • It just feels good and reduces your stress levels (the more savings you have, the less financial woories you have).

I’ve always found saving as a neccesity to become wealthy rather than an option. It created incredible opportunities for me to buy things that couldn’t be bought by just levearing. I am currently working (as a volunteer Mentor) with Princess Trust, a UK based charity that helps younger people aged 13-30 to find work or more importantly to start their own enterprises. This could be a very simple business (from a grocery shop to more skilled business such as computer repair shops or website design consultancy, etc.). When I talk to younger people and talk about savings, the number one complaint is almost always the same: “I am not earning enough to save anything.” I don’t normally take this as an excuse and explain to them that every little helps…

Saving $100 a month over five years, based on net interest of 5% a year – if interest on savings accounts return to respectable levels once the recession has abated – mounts up to $6,962.30. Because you earn interest on your interest each year, returns are compounded and therefore better than you might expect. For example, save the same amount over 10 years and your savings rise to $15,848.14! In some parts of the US, you can buy a foreclosure property for this money and start renting it…Not only you will receive the rental but also the property will add value over time as well…which will enable you then leverage to buy more property and hence more rental income. Double whammy! (Rule: money pulls money!). The US Annual personal saving rates can be seen in the graph below:

savings

There is an interesting chart published by Business Insider (below). It emphasizes the impact of compound interest, and the importance of starting early. Saver Emily, represented by the blue line, starts saving the exact same amount as Dave (the red line), but begins 10 years earlier. Ultimately, she contributes around 33% more than Dave over the course of her career, but ends up with almost twice as much wealth as he does! (Rule: Start saving as early as possible!)

Saving compound

Another very interesting chart (that is published by Business Insider again) is how much you need to save to get to $1M at retirement.

savings monthly compound

For all those younger followers out there, I hope this can give you an idea of how important saving can be. There has been never a better time to start saving than now.

I hope it helps.

MT

One thought on “The magic of Compounding and a few ideas on saving

Leave a Reply

Your email address will not be published. Required fields are marked *