The Benefit Of
Starting To
Save
early
W
going to do next. In all but the most extreme situations, the cost
of putting off saving exceeds the benefit of starting at the bottom.
This is because even money that has decreased in value is a better
contribution to a long-term objective than money that has been spent
on short-term gratification. And while it is easy to justify spending
now, with the rationalisation being that you’ll save more later when
you can afford it, it is very difficult to get into the habit of saving if
you’re used to having all of your income at your immediate disposal.
hether you are saving towards a short-term goal, perhaps
an overseas trip, or something that seems to be a long
way away, like a deposit on your first house, or your
retirement, it’s a good idea to start now.
Each month that you put off saving in favour of spending either
increases the amount that you will have to save in the remaining
months, or pushes out the date at which you will reach your goal.
Starting to save earlier allows you to extract maximum benefit from
compounding – i.e. that powerful phenomenon that explains how
investments can grow so remarkably if given time. Like many people
you may have questions about the “right time” to invest. The right time
is now, because you can’t get time back once you’ve spent it.
Make a start
The easiest way to get on track to meeting your goals is to start as
early as possible. If you start from your very first paycheque, you’ll
never feel like you’ve lost something by saving instead of spending
now. And the little bit of short-term gratification that you miss out on
will be worth it when you are on that overseas trip with your friends,
or are handed the key to the front door of your new home.
To learn more about investing visit www.allangray/investingexplained/.
Time in the market vs timing the market
It is true that you receive better value for money if you invest after the
market has fallen, rather than at its peak. However, this doesn’t mean
that you should put off saving if you are unsure what the market is
Graph 1
shows that if investments are returning 9% per
year and you need to meet your savings goal in 10 years’
time, delaying saving for just 18 months will increase the
amount you need to save per month by more than 25%.
With less time on your hands, the cost of a delayed start
is naturally even more pronounced. The red line on the
graph illustrates that when your timeframe is five years, an
18-month delay results in more than a 50% increase in the
amount required per month of saving.
5 year obtective
Required increase in monthly contribution
10 year obtective
Delay before starting to save (months)