Savings growth

Get Rich by Compounding High Interest Savings from Childhood

It is never too early to start investing for the future. With compound interest starting saving a few years earlier will give high yield on savings or pensions.

If parents or grandparents were to create a high yield savings account and invest £1,000 (or Dollars or Euros) when a child is born it could easily become £5,500 by the time the child was eighteen years old. At retirement, at say sixty, that would have become over £300,000. Waiting just five years and retiring at sixty-five would increase the sum to almost £500,000.

These figures assume a 10% interest or growth rate (after management charges. That is typical of the long and medium term average for the main stock market indices. They are based on the growth of the FTSE 100 since 1950 and 1980 and do not include any dividends received and reinvested which would give even higher returns. High yield savings accounts would be an option for those for whom the volatility of the equity markets would be a concern but may not produce the same high yield rate.

What is Compound Interest?

Compound interest is quite simply where the interest in one period is not withdrawn but added to the starting capital. In the subsequent period. Interest is then earned on both the initial capital and the added interest. This is then added to the capital and so on in the following periods. This results in an exponential growth of the sum invested - see the savings chart below.

Start Late and Pay the Price

If instead that £1,000 were invested for the child’s twenty-first birthday then the sum at sixty would only be £10,000 instead of over £300,000. Leave saving for retirement even by a few years therefore reduces the eventual pension substantially. It shows that good habits should be encouraged in children early so that they carry the ideas into their adult lives.

A newly independent young person starting work for the first time would find it very wise to start putting savings away regularly however modest. It would pay off when he reached retirement or sought a change of lifestyle. It would also provide security if changes are forced due to redundancy or lay-offs in uncertain times.

Save Little and Often to Maximise Yield

At an annual interest rate of 10% the principal doubles from interest alone in less than eight years. Even at 4% the total cash doubles in about eighteen years. A simple rule of thumb to give the approximate time it would take to double an initial sum is to divide 72 by the percentage interest rate. It suggests that 6% would double the sum in twelve years; it is actually about a month or so less than that.

If the child with £1,000 at birth adds £100 at each birthday then the sum at twenty-one becomes £10,000 and at sixty it will be more than £600,000. Increasing the additional savings to £1,200 per year (£100 per month) from starting work at twenty-two would produce total savings at sixty of £1.2million and nearly £2miliion at sixty-five. Obviously increasing that regular saving as earnings increase would make a huge positive difference to the final sum.

With that approach the wise child and adult could retire as a millionaire with very little impact on her lifestyle in the meantime. It might also mean that she would be able to keep the capital and live on the income without having to buy relatively expensive annuities.

Profit by Starting Early with Good Saving Habits

For young people starting out now traditional final salary pensions have all but disappeared and third party provided by insurance and pension companies do not perform well especially as they take their fees even when the fund does badly. Understanding the benefit of compounding interest and careful self-investing in tracker funds or high interest savings accounts with low charges is likely to result in a more comfortable retirement or the opportunity to change lifestyle.

Modest saving regularly in a high yield savings account or fund throughout life will have a major impact on an individual’s comfortable retirement and security in the interim. It is a simple message: save something however small, frequently and become rich which gives security and comfort.

Compound interest is therefore a friend to the saver but compounding Interest on borrowing and debt is a problem especially for the seriously indebted.

This is based on a simplified investment approach to illustrate the importance of long-term saving and investment and how high returns can be achieved with little effort.. Actual saving methods would need further consideration and would change over time as the saver’s view of risk and other considerations changed.

 

 

First appeared on Suite101

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