July 14, 2023
What stops you saving for the future? Are you reluctant to take advantage of your tax-free savings allowance for an ISA? Or to top up your pension?
In the current financial climate, you might well be feeling that you’d rather keep your money where you can see it.
One thing that we find a lot of people say to us, especially younger clients, juggling the financial commitments of buying their first family home and bringing up a young family, is that they can’t afford to save a lot each month, so don’t see what difference it will make in the long term.
Honestly, if we had a pound for every time we’d heard that over the three decades we’ve been in business…
We’re not here to judge. Whether you are planning to take advantage of the increased pension savings allowance from this year, or opening your first ISA, we’re here to advise you. Whether you feel pretty clued-up about how the financial world works, or consider it a bit of a dark art, we’ll help you to build your understanding.
One of the key things we tell our clients is that it is never too late to start saving for the future. And it’s true. But it’s also never too early, even if you think the amount you’re putting away each month is too small to make a big difference.
To show you how wrong you might be, here, as they say, comes the science bit.
One of the less-understood aspects of saving and investing is how compound returns work.
‘Compound interest’ describes the interest on savings calculated on both the initial capital and the accumulated interest added each year.
In the same way, making an investment return on past returns can make a huge difference to your long-term plans. For example, over 10 years, a £100,000 deposit receiving 5% simple annual interest would earn £50,000 in total interest. But if the same deposit had a monthly compound interest rate of 5%, interest would add up to about £64,700.
Source: The Power of Compound Interest: Calculations and Examples (investopedia.com)
Let’s look at it another way.
Say you put £1,000 into a savings account with a 10% interest rate and the interest compounds annually. At the end of the first year, you will have £1,100. The initial £1,000 is your principal balance, plus you earn £100 in interest.
At the end of the second year, you will have £1,210—the £1,100 from the previous year, plus £110 in additional interest (10% of £1,100). Instead of calculating interest based solely only on your original principal, with compounding interest, the 10% applies to the principal plus accumulated interest.
By the end of the 10th year, you’ll have £2,594, more than double your initial savings—and you can thank the power of compounding which Einstein famously described as “the eighth wonder of the world”. You can see why!
Source: How Compound Interest Works – Experian
Of course, when you make investments in, say, a pension, rather than a simple savings account, there are other factors than interest involved.
That’s where an independent financial adviser like Talis IFA really comes into their own.
We’ll look at where you are now and where you want to be in the future. We’ll consider your attitude to investment risk (the value of investments can go down as well as up), and, because we’re independent, consider the merits of all the options available to you.
If you’d like to start a conversation about how to start building your financial future, get in touch. Click here to find a Talis IFA.
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