Product manager- savings and investments at Standard Bank, Takumi Daling, says the results are staggering, the younger you start your saving journey.
Albert Einstein once said: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it”.
“Of course, there is never a bad time to start saving and we recommend those who do not have a strict culture of saving in place, start sooner rather than later. However, it is clear that when you start saving from a young age, the power of compound interest is nothing short of amazing,” Daling said.
Even if you do not have a lot of excess money, getting into the habit of saving now will condition you to keep saving and ensure you reap rich rewards, thanks to the power of earning interest on interest.
According to Daling, this concept can be easily illustrated by way of comparing 3 different scenarios.
1. Child: Investing only R1,000 once-off for a child at birth (@ 10% annual return)
2. Mary: Investing R1,000 per year from the age of 22 to the age of 29 (@ 10% annual return)
3. John: Investing R1,000 per year from the age of 30 to the age of 70 (@ 10% annual return)
In contrast, John, who invests R1,000 every year, at a 10% return – but started at age 30 and saved to age 70 – would have a lot less – just R487,852 when he turns 70. He would also have invested R41,000 compared to the R1,000 invested by the child.
To highlight the point further, Mary, who invests R1,000 a year from age 22-29, at 10% annual interest, would have invested a total of R8,000 and would be able to walk away with R569,338 when she turns 70.
Daling cautioned that any discussion on saving needs to take the negative effects of inflation into account.
“You need to increase the amount you save each year by at least the inflation rate,” she said. In order to give you a clear picture of how inflation affects your pocket, it is necessary to look to the future. Let’s assume that food costs, on average, rise by 7% per year over the next 10 years and your take home pay rises by 4% per year.
If you are currently spending R2,000 per month on groceries and your take home income is R10,000 per month – your grocery bill will equal 20% of your take home pay. Ten years from now the same groceries will cost you (at 7% inflation) R4,020.
If your salary increases at 4% per year over the same period, your take home pay will be about R14,908. This means that your household shopping would then represent 27% of your take home pay. So, this means that you will end up spending more money on basic goods and you may need to make some sacrifices, given your standard of living.
“The above scenario shows that a 4% net return against inflation of 7% per year means that you are actually going backwards in terms of buying power,” said Daling.
This is of course the worst-case scenario, but what it illustrates is that when you save, you have to be aware of the effects of inflation. You need to increase your annual savings by at least the prevailing inflation rate to see a decent return on your investment.
“Whichever way you decide to save, you will see the results if you are consistent and get the right help from the start. Start now so you can relax about your future and achieve the lifestyle (and retirement) you are working so hard for,” said Daling.