By Victoria Reuvers
We all go into the new year full of fight and fury to accomplish our list of goals. I’d like to propose a new resolution to those 30 years and younger. Save R200 per month. (That’s equal to sacrificing roughly two coffees per week.) Here’s why…
We are told to start saving as soon as we get our first salary. This is of course done, with very good reason. Not only does it give you a meaningful financial start in life, but it means that the power of compounding can work its magic in the background over a much longer period. Compound interest is the wealth-creating effect that happens when interest from your investments earns interest on itself.
The problem is that most of us simply don’t walk in on our first day of work and earn a massive salary. You’re fortunate if you even fall on the SARS radar when you start. This means (for most) that after they’ve paid for their basic expenses, there’s not much left to spend, if any whatsoever. And if you are in the fortunate position of having money left to spend – you must make a “tough” choice – spend and enjoy now or save for later.
You’re at the prime age of enjoying new experiences, meeting new people and figuring out who you are and who you want to be. Having to imagine what your life will look like at the age of 65, is not only a tall ask, but it feels like an entire lifetime away.
But what if you knew that even with a mere R200 monthly contribution into a savings account at the bank and generating a return of 6% per annum, if you start early enough, you can build your wealth up to R1 million. Yes, it may take you 55 years, but it proves that starting the habit of saving and being patient works, plus, you’ll have R1 million to show for it. (Read the full article here on “How to become a millionaire”.)
Whether you are young or old, an investor or not that interested in the markets, I think we all know in some shape or form that markets are expensive right now and things are a little crazy.
Markets are fickle and volatile, that’s no secret. You may very well have hit the sweet spot several times and bagged a very healthy return on Crypto or other alternative investments. . But as quick as you can make a buck, you can lose it all as quickly as well.
The one, and most cardinal investment advantage that you have when you are young, is time. And time in the market, will always remain superior to timing the market.
As a young adult and new to work-life, the concept of a monthly inflow of money is glorious, no matter how small. The temptation is to spend your well-earned money. And yes, why should you save, you have so much time ahead of you and you will save when you earn more. Right?
Let’s look at the below scenario:
• Example one: Juno, begins saving R500 per month from age 22 through to age 31. After those 10 years of saving, she stops putting money in altogether. Juno keeps her money saved but stops contributions and only earns compound interest.
• Example two: Max begins saving R500 per month at age 35 and keeps saving that amount all the way through to retirement at age 65. He also earns compound interest on his savings.
Assuming a 7% annual return, who ends up with more money by age 65?
Even though Juno saved for only 10 years and Max saved for 30 years, Juno started sooner and benefitted from the power of compounding. Juno’s total investment stands at R871 000 versus Max’s total investment of R614 000.
Now this return may not sound as exciting as a quick crypto return and it certainly isn’t as fast or as much fun, but it’s pretty foolproof.
As boring and uninspiring as that may sound, there is something fabulous about it too. Regardless of how much you invest, if you just have the patience to let your investment compound and the discipline to continue saving through good, bad and boring times and to not get distracted, you will be amazed by the power of compounding over time.
Victoria Reuvers is the Managing Director of Morningstar Investment Management South Africa