The mother of all savings plans
How compound interest snowballs your wealth
Happy birthday to my lovely mum, who turned 81 this week.
She has helped guide me through the obstacles of life just like a great parent does. And although investing wasn’t something that was an option for her, it probably is for you.
Today you can invest easily – so easily that some apps will round up your spending and save that for you.
But when you do invest you must look far into the future, to the very long term and way past all the current noise in the markets – because time passes so quickly and you want to find and take all the opportunities now.
As I have aged and become a parent, I have been able to reflect on my own life experiences.
As a young financial planner, I had to explain to clients what I had been taught, not what I had experienced. Now, after more than a quarter of a century in the trenches, I often talk from my experiences.
One message I preach is the value of compound interest, famously described by Albert Einstein as the “eighth wonder of the world”. He added: “He who understands it, earns it; he who doesn’t, pays it.”
Compound interest is when the interest you earn on a sum of money is reinvested and generates additional interest. It’s like when you roll a snowball down a hill as a child – it starts off really small, then gets bigger and bigger, and if it keeps on rolling it gets really big, really quickly. That’s compounding – the growth is faster over time.
Imagine if my grandparents were able to invest for my mum when she was born in 1941. She would have averaged over 11% per annum growth over an 81-year period. So £1,000 in 1941, which I appreciate was a significant sum back then, could today be
worth more than £5.8million from the interest alone. And although her parents could not do that, it’s open to many people today to invest in a way that helps their children or grandchildren. Remember, people can only enjoy the shade of a tree on a hot day because someone planted it long ago.
You have the ability to change your financial future, and perhaps the financial future of your children, but you must take that first step.
When I speak to a young couple starting out I suggest that they try to live off one salary and save the second one because if they plan for a family, one salary may become a reality one day. I encourage them to invest this saved money, because if they can put in £1,000 per month, at 10% pa after 35 years they could have more than £1million to help them retire.
Now that I can look back on my career with experience, I know 35 years will pass in a heartbeat.
You have a choice – the 35 years will go by whether you save the money or not. Eighty years ago, my grandparents didn’t have that choice – they didn’t have any knowledge of, or access to, the world of investing. You do.
Thank you for all your wisdom mum. Happy birthday and I’ll be sure to continue investing.