Compounding: it’s simply magic!

Forget about location, location, location being the key to a good investment outcome. For now, let’s think of the most important ingredient as being regular, regular, regular!

A regular savings plan can turn small amounts of money into a sum that can take you closer to your dreams much faster. All that’s needed is time and discipline.

For example, let’s see what happens to an investment starting with just $100 and adding $100 each week from your regular income. Table 1 shows what the investment value would reach after five years and up to thirty years. In this example, we have assumed that the investment pays a return of 5% per annum (paid quarterly).

Table 1: Regular savings plan of $100 per week compounding monthly.

The results show that a regular savings habit can turn small sacrifices into real outcomes.

It might sound picky, but in return for self-restraint you can see what can be achieved:

• the $29,000 in 5 years might go towards a deposit on your first home or an overseas holiday;
• the $67,000 in 10 years might contribute to your young children’s secondary or tertiary education; or
• the extra $258,000 in 25 years might help you to retire more comfortably or earlier than you thought you could.

Any of these goals would seem to make your small sacrifices extremely worthwhile in the long run. And remember to write down your financial goals as early as you can because it’s much easier to make those sacrifices if you know what they are helping you to achieve.

Reducing expenses is not the only way to find a spare $100 each week. Another good time to start a savings plan is when you receive an increase in your disposable income from a new job or a pay rise. Before you spend the extra money, put it away.

The trick is to start soon

Everyone’s ability to save is different. If you can’t save $100 every week, the above figures are still worthy of your attention. For example, if you can save $50 per week simply halve the results in Table. Conversely, if your savings capacity is higher, multiply the figures.

The results also demonstrate the effect of time and compounding returns on the value of your investment. The sooner you start, the less you need to save in order to achieve the same outcomes.

And finally…
The examples we have used here are aimed at highlighting the benefits of time and discipline when it comes to investing in a regular savings plan. To keep things simple, we have not taken into account other factors that will impact on the outcomes you can achieve, such as taxation, fees and differing investment returns. These factors are important; and are considered by us at Stream Financial.

We can help to unravel what type of investment/s that are best suited for you, by putting a lens over your own specific circumstances, including your goals, timeframes, and attitude to risk (volatility). The information collected can then be utilised to put in place an investment plan suited to the induvial to ensure your wealth creation needs are met.

You can start a compounding savings plan on your own or talk to us – we can show you more options to help you achieve your dreams sooner.

Sources:

Compounding calculation – www.moneysmart.gov.au Compound interest calculator