We often procrastinate when it comes to saving. Instead of paying ourselves first we fund our lavish lifestyles, albeit in cash or using your paycheque to mostly repay debt. In the midst of the rat race and keeping up with the Joneses we don’t realize that we are missing out on the 8th wonder of the world, as Albert Einstein coined it when it comes to accumulating for later life. Sadly, this much-needed help is, for the most part, lost if you have no retirement savings by the time you reach the age of 55.
Why is compound interest such a great way to build your retirement savings? Because it’s earning you interest on interest. For example, suppose you deposit R1,000 in an investment account that pays ten percent interest annually. At the end of one year, your balance will have grown by R100 (that’s ten percent of your starting thousand) to R1,100. Assuming you leave the entire R1,100 in your account, the interest you’ll earn during the next year will be greater – ten percent of the entire R1,100.
That’s the beauty of compound interest and how just by saving more, your money can work even harder for you by maximizing your savings over time. It’s why the simple act of saving regularly, combined with the power of compound interest can increase your retirement savings over time. Even if you make no additional contributions and just leave your money alone, compound interest will continue to earn you money.
If you procrastinate and start to invest later, you’ll have to save a lot more money to reach your goal.
If our goal at age 65 (retirement) is R10 000 000, which is modest in today’s terms, and we assume a net compound return of 12% then we can determine how much we’ll need to save per month starting at various ages. The chart below illustrates the price of delay: