The first and most important plank of your retirement planning should be getting to grips with the wonder of compound returns. Compound returns are one of the reasons why rich people seem to keep increasing their wealth whilst other people struggle to get ahead. Compound returns are the reason that investments build and build onto themselves and grow over longer periods, if left alone. And with compound returns, even the smallest rate increase can allow you to make much higher savings in the long run. Think about how it works with a simple savings account. You leave some savings in an account and those savings earn interest in their first year. The next year you earn some interest on the savings plus the interest. The year after, you earn some interest on the saving plus interest plus interest. And as this process keeps going, so your savings keep growing at an increasing rate. Compound returns are built around this process, the combination of time and rate of return.
So how important is the rate of return? Well, it really matters – the better the rate of return you can get, the quicker your savings will grow. The following table shows how different rates would compare on a monthly £100 savings investment:
And again, what becomes immediately clear is that the earlier you can start putting those savings away, the better. Now this isn’t rocket science and we’ve all heard this kind of thing before but what is striking is just how much of a difference it would have made to someone’s life if they had started at 20 and what a difference it still could make if they now started saving right away, even in their 40’s!
That’s up to you. The examples above were based on £100 a month, but not everyone can afford that. As mentioned in the introduction, you should only save as much as you can afford and not at the expense of the present. Any regular contribution will quickly add up as long as you stick with it and when you can afford more at a later date, then you can up your contributions accordingly. The most important thing you can do is get on top of your finances and start saving, something that is covered in the next sections.
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