Saving Savvy: Get interested in compound interest
What does the expression "time is money" truly mean? In this first class of a five-part series, Susan, our savings expert, explains why it's better to start saving sooner rather than later.
Everyone procrastinates sometimes. I myself often put off things until tomorrow. In fact, you've just reminded me that I'm out of clean socks.
But when it comes to saving, procrastination can rob you of a lot of income. And that would be a pity. So how about we use your precious time to your advantage?
Today, we're going to learn what "time is money" truly means.
Good reasons for saving
Before you start your savings, you may ask yourself: why am I saving? To buy a house?
To retire comfortably?
Savings are for projects of all shapes and sizes… whether they require a long-term or short-term investment. Such as… planning a trip, renovating your kitchen or going back to school.
Savings are for projects of all shapes and sizes… whether they require a long-term or short-term investment. Such as… starting a business, planning a wedding, taking a year off or starting a new hobby.
But it can also be a way to improve your financial freedom, to help you deal with unforeseen events or to buy yourself a little luxury from time to time.
Saving up for a project can make the whole process feel more motivating and tangible. It allows you to link realistic financial objectives to your projects. And the sooner you start investing, the more it pays off.
Savings and the notion of temporality
Indeed, it's more profitable to start when you're young with small sums than to wait until you're older to invest larger sums.
Time is the most important factor in building wealth. Every extra year can make a huge difference in the long run!
Let's take a closer look.
Compound interest and return
Let's say you start contributing $1,500 per year to an RRSP when you're 25, and you do so for the next 30 years. With an average annual return of 3.5%, you should have saved $77,434 by age 55. That isn't too shabby.
If you wait until age 40 to save the same amount, which is the equivalent of $45,000, you will have to contribute $3,000 per year for 15 years. With the same 3.5% average annual return, you'll have accumulated $57,887 at age 55. That's about 25% less than in the first scenario. Quite a big difference, isn't there! And that, my friends, is the impact of compound interest! This means that an amount on which interest is applied will grow faster and faster over time. The interest generated by your initial amount also generates interest. In other words, it grows exponentially.
If your math skills are a little rusty, know that there are a ton of online calculators such as the one provided by the Fond de solidarité FTQ which can help you estimate your investments' future value.
So when they say that time is money, it's because if you start saving now, your money will be working for you. But it's NEVER too late to start saving!
Now you can proudly say that you know how compound interest allows the money you've invested to multiply, ensuring you get the comfortable and cozy retirement you deserve.
In the next class, I will show you that doing regular budgeting exercises will help you maintain good health… financial health, that is.
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About FlexiFonds de solidarité FTQ
FlexiFonds de solidarité FTQ Inc. is a wholly-owned subsidiary of the Fonds de solidarité FTQ. FlexiFonds de solidarité FTQ Inc. acts as the principal distributor of the funds' units and is a mutual fund dealer registered with the Autorité des marchés financiers.