How saving early and often can help grow your investments

How saving early and often can help grow your investments

Saving money can be a challenge at the best of times. But did you know that with a regular savings plan in place, and an early start, you could be much further ahead when it comes time to consider retirement?

That’s because when you start saving early, your money has more time to grow, allowing it to benefit from compound growth. Compounding can help your money grow, in most cases, far beyond the amount you originally invested. So, how does it work?

Compound growth is similar to compound interest. With compound interest you’re essentially earning interest onSaving Early interest – you earn interest on the money you put in at the start, as well as the money you add later, plus on all the interest that collects over time. This gives you a larger total amount to earn future interest on, leading to even more growth. Over time, you have a powerful recipe to help you grow your money.

The concept of compound growth is similar to growing a forest of trees. The forest can grow in two ways – trees can be planted by hand (like your regular investment contributions), while others may grow on their own through seeds that fall from mature trees (like compound growth on your contributions). In time, a few trees planted early can grow into an entire forest without much effort.

To understand how this could affect your savings, consider the journey of $240,000, saved two different ways. If you save $500 per month with an annual return rate of six per cent compounded monthly, beginning at age 25, you would have $1,000,724 at age 651. Conversely, if you tried to catch up on your savings, contributing $1,000 with the same annual rate of return beginning at age 45, you would only have $464,361 at age 652. Under both scenarios, you’ve invested the same amount with the same growth rate, but in the first scenario, your money has twice as long to grow, and you end up with more than twice as much.

The beauty of saving early and relying on the power of compounding is it doesn’t take a lot of money to get started. Relatively small amounts consistently invested regularly, especially when you are young and early into your career, can make a significant difference in the total size of your savings down the road. Those small deposits can be the difference between being confident with your investment success and having to worry about it much later in your life. It can be as easy as sitting back while you let your money do all the work and grow into something much bigger.

The strategy for compounding:

  • Invest early – the longer your money is invested, the more time it has to grow. When it comes to compounding returns, time is on your side.
  • Contribute regularly – regardless of the amount you can afford – the important thing is to start and be consistent. Even small contributions made each month will grow. You can increase your contributions as your financial situation changes throughout your life.
  • Don’t take money out – as your savings grow and earn compound returns, the gains made through compounding will also help you build your wealth.

Whether it’s through a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA), saving early and saving often can give you a head start on planning for retirement. And that planning may allow you to reach your financial goals sooner. I can help you review your financial goals and prepare for the future.

Monthly Savings vs Paying the Bills

Have you ever noticed that your wallet manages to empty out no matter how much you put in there? Sometimes it feels like $80 lasts no longer than $40.

It may explain why that emergency $20 is hidden in one of your shoes. You just can’t trust your wallet.

Okay, you’re the one actually emptying your wallet, but the point remains: we tend to spend whatever is in our pockets. This offers an important lesson for the way we handle all of our finances.

Perhaps the most well-known mantra in financial security planning is “paying yourself first.” It endures because it usually works. Another well-known guiding principle is that paying down debt trumps all. But this one isn’t quite so indisputable.

Monthly Savings

The value of creating a clear spending plan

People living paycheque to paycheque are bound to feel shackled by their financial responsibilities. Even some people making a decent living think they’ll never get ahead. They need a formal process that will slow things down and allow them to put money away.

Creating a simple budget or spending plan is the first step. Make sure to pay your bills on time – especially those that keep the lights on and the water running. Preauthorized payments are a great solution. You also need to pay the rent, buy groceries, get to work and cover other day-to-day expenses.

If you have debt, you’ll need to devise a realistic schedule to repay it. But make sure you leave money aside for savings, even if it takes longer to repay your debts.

  • Putting money aside every month establishes a useful routine for efficiently managing your money.

The importance of creating sensible spending habits

Putting money aside every month establishes a useful routine for efficiently managing your money. First, it creates an emergency fund for a rainy day. Second, treating your savings as a priority allows you to start a financial security plan, the key to getting money to work for you.

Carrying non-mortgage debt is not a good thing. But even more alarming is holding that debt while not having any savings. The debt may cost you more in interest charges than your savings account is generating, but that cash gives you much-needed options.

Why setting money aside is a no-brainer

Setting aside a share of your monthly income needs to become routine. The best way to achieve this is by setting up automatic transfers to build monthly savings. If your pay is deposited into a bank account, arrange to have a set amount transferred right away to a separate place – perhaps a high-interest savings account. Once you have an ample emergency reserve, transfer some to a longer-term investment.

Your workplace may also offer a seamless way to save. Some employers will put a fixed percentage of your gross pay into a group registered retirement savings plan (RRSP). You can also tell them to deduct a certain amount of your pay. These programs may even provide a bonus amount if your contributions hit a certain threshold.

Growing your savings with automatic transfers

When your net pay increases, automatically boost the amount you transfer into savings. If you’re prudent, you may hit a point where your earnings allow you to increase your overall savings rate. The sooner you reach it, the faster your wealth can grow.

Flying under the radar

Building savings isn’t easy – after all, there are plenty of fun things to spend your money on. But watching your savings grow can be motivating. And as long as the process is automatic, your wallet won’t notice the money is missing.