Power of compound returns

We have written about the power of compound returns before, but perhaps it is time for a refresher. The volatility we have experienced over the last two years could feel like the norm, but we should look at it with this in mind: if we manage to get a proper education and then go on to find a job, our investment lives could start from as young as twenty years old. This does not mean that we could all start saving the recommended 10% of our income there and then, but it does mean that we could get into the habit of putting a little money away before we start spending our salary.

The important point here is to remember that the sooner you start saving, the smaller is the amount you will have to put away regularly to eventually reach the same target amount. This point is illustrated in the graph below. The basis of this calculation is that you want to accumulate R6 million at age 60, and you can generate an 8% return per annum on your investment. If you start at age 20, you only have to save a total amount of R824 977 (R1 719 p.m.) over the 40 years to get to R6m at age 60. If you start at age 30, you have to save a total amount of R1 449 315 (R4 026 p.m.) over the 30 years to get to the R6m at age 60. The sooner you start saving, the less you have to put away, because time and the power of compound returns are on your side.

The biggest problem most people face with regard to saving, however, is not the timing, returns or amounts involved, but rather our own self-indulgent habits.  If you are lucky enough to land a very good job early on – a job that pays you more money than you can spend on the basics – you may prefer to buy fancy cars and expensive clothes, or go on exotic holidays, because you believe there will be sufficient time for you to start saving when you are older. The problem is, however, that once you develop an expensive habit, it usually becomes addictive and very difficult to break. The other problem is that you will attract bad friends, like the banks. Banks will fall over their own feet to give you credit, home loans and all the rest. This will put you in their debt forever and you will never arrive at that point where your passive income from your investments can support you lifestyle.

The best investment advice any young person could ever get, is to start early, be boring, be patient, be diversified, be persistent and do not waste.

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