How committing to saving a regular amount makes a real difference


09-01-2020
Compund interest explained_graphic

Sarah Austin, Independent Financial Adviser from Martin-Redman Partners, Cambridge, explains the power of time and compound interest when investing for your future.

This January there has been a glut of articles in the press about starting 2020 with new resolutions and new intentions.

One challenge that caught our attention came from Play Pennies with their 1p savings challenge. They challenge you to save 1p on the 1st January, adding a penny per day over the year; so 2p is saved on the 2nd , 3p on the 3rd and so on. By the 31st December you will be saving £3.65 per day – by the end of this year you would have (a surprising) £667.95 saved.

What this demonstrates in a simple way is the power of regular savings and how increasing the amount you are saving over time can make a huge difference to the eventual amount of money you end up with. The savings pot could be a deposit account, Individual Savings Account (ISA) or Pension; but the same rule applies to all saving regardless of the type of ‘savings’ pot it is.

There is also another very significant tool which helps build up the amount you have saved; which is compound interest. This is the effect of the savings interest or investment return you receive in year one, being added to the original sum saved which in turn attracts interest, and so on. This creates a ‘snowball effect’ over the years with growth on growth, which quickly adds up.

We have run some calculations to illustrate the significant effect regular saving over time and compound interest has. To build a pot (say a Stocks & Shares ISA in this example) of £200,000 at the age of 60; assuming an average net growth rate on the investment funds of 4%:

·        A 25-year-old would need to save £91,980; equivalent to £219 per month

·        A 35-year-old would need to save £117,000; equivalent to £390 per month

·        A 45-year-old would need to save £146,880; equivalent to £816 per month

·        A 55-year-old would need to save £183,780; equivalent to £3,063 per month

What is staggering is the huge difference that time saves you if you are investing over a longer term. The 25-year-old only contributes £91,980 whereas the 55-year-old has to contribute £183,780, near enough double to end up with the same £200,000 pot at age 60. The effect compound interest has, has significantly reduced the amount the younger person needs to save.

Imagine if this pot was a pension – you’d benefit from at least a 20% reduction (based on you being a basic rate taxpayer) in the amount you’d need to contribute as the government adds 20% to your pension pot in the form of tax relief.

Committing to saving a regular amount and starting sooner rather than later really does make a huge difference. Once you have built that pot of money, you have options to make improvements to your lifestyle; whether that be to pay off a mortgage, send your children to private school or retire early.

 

Arrange a meeting in January 2020 to discuss your financial planning
Please contact us info@martin-redmanpartners.co.uk or call us on 01223 792 196 to arrange an introductory meeting with one of our Independent Financial Advisers this January. The first meeting is at our expense – there is no cost to you. We hope to hear from you soon.

About Martin-Redman Partners  

We are a team of experienced Independent Financial Advisers (IFAs) who can advise on your personal or business financial arrangements. We have been building trusted relationships with clients for many years by articulating clear and tailored recommendations in areas ranging from investments to retirement planning, to complex estate planning advice. 

We offer expert independent financial advice throughout Cambridgeshire, Leicestershire, Suffolk, East Anglia and the South East.  Many of our clients are within, or are in the surrounding areas of Cambridge, Grantham, Stamford, Bury St Edmunds, Frinton on Sea, Ely, Peterborough, Huntingdon, Cambourne, Newmarket, Soham and Oundle.

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction. 

 

We provide independent financial advice on investments, pensions, inheritance tax planning and protection. We work with private individuals, businesses and professional introducers, such as accountants and solicitors, to ensure our clients financial advice needs are met.

Martin-Redman Partners