Patience key to savings
TURNING $5 a day into $50,000 is not as daunting as you might think.
All you need is patience, and the power of two of the most popular and proven laws of investment.
Patience is required because it’s going to take more than a decade of daily deposits to get there, and power is gained from embracing compound interest and automatic investing.
Five bucks won’t buy you much these days, but anyone who can diligently put that much away daily into an investment plan will reap big rewards later on.
The best starting point for number crunching is the Australian Securities and Investments Commission’s moneysmart.gov.au compound interest calculator, which shows in seconds how much your deposits can grow over time.
Compound interest is the process of earning interest on your interest on your interest, and so on, so that over time the interest you receive dwarfs the initial investment.
You can use ASIC’s calculator to plug in your deposit amount, frequency of deposits, number of years and interest rate — which your expected rate of investment return — and it will toss up a dollar figure that for many people is surprisingly large.
Five dollars invested every day reaches $50,000 in just over 14 years, according to ASIC’s calculator and based on an investment return of 8.5 per cent a year. That average annual return is much higher than the 2-3 per cent people are getting from bank deposits today, but below total sharemarket returns and most super funds’ returns over the past five years.
If 14 years is too long to wait, bumping up your deposits to $10 a day gets you to $50,000 in just over nine years.
The world’s most successful long-term investor, billionaire Warren Buffett, once said that the stockmarket was a device for transferring wealth from the impatient to the patient.
Patience is vital because any investment likely to return 8.5 per cent annually is going to have ups and downs — sometimes pretty steep ones.
When investment markets are terrible, like they were during the depths of the Global Financial Crisis a decade ago, your patience gets stretched even further and it can be difficult not to crack.
The heaviest selling during the GFC was during early 2009 when many people simply gave up. They sold out and their money was transferred to brave — and fortunate — buyers who have enjoyed stellar growth since.
Patience pays off for people who make automatic investments.
Depositing money at regular intervals means you are buying assets during the good times — when prices are soaring — but also the bad times when
The future always seems further away than the past and can create a mental barrier to investing.
However, if you began stashing away five bucks a day a decade ago, you’d be tens of thousands of dollars richer than you are now.