Saving for retirement in the most expensive city in the world for 5 consecutive years is no easy feat. Saving for early retirement is even more challenging in this city.
So how should one plan for retirement in the most expensive city in the world? The answer is to start saving early and, enjoy the benefits of compound interest.
What is compound interest?
You may now be wondering what compound interest is. Compound interest means interest calculated not only on the original investments, but also on any interests, dividends and capital gains that accumulate so your money keeps growing exponentially over time. It is a cycle of gaining interest on interest causing a snowball effect in your wealth. Compound interest makes your investments grow at a faster rate than simple interest which is only calculated on the principal amount.
Why one should start saving and investing early and, enjoy the benefits of compound interest
It’s always better to start saving and investing early. The later you start, the larger the proportion of your income you will have to save up for your retirement. If you start saving early, there is a possibility that your money may exceed those who save more than you, but start saving later in life. This is called compound interest and it can do wonders to your money.
Let’s have a look at the chart below from JP Morgan and it shows how compound interest can increase your savings and why it’s the best to start saving early.
In the chart above, let’s have a look at Susan and Bill who invest the same amount of money but Susan starts earlier than Bill. Despite Susan investing for only 10 years, she ends up with more wealth than Bill who invests for 30 years in life. By starting early, Susan’s money had a long time to multiply, exceeded that of Bill and she was able to better take advantage of compound interest. Chris is the one who is able to best take advantage of the compound interest as he starts early and invests steadily throughout until 65 years old.
Some of you might be regretting the lost time after reading this article but do not worry. It does not matter what your age is and, what is imperative is to act NOW rather than to delay your financial planning. Here, a list of important points have been compiled for you to get the most out of your savings.
- Now that you realize how great time can have effects on your savings, you should not waste a single day and start acting as soon as possible.
- Always invest in an investment channel that offers you compound interest. Compound interest always outweighs the benefits by simple interest.
- Look for investments that offers a higher frequency of compounding. E.g. Invest in the channels where compounding in done quarterly rather than every half a year or annually. The higher the frequency of the compound, the higher the gains from your investments.
- Have a savings target and stick to it. As the need to stick to your savings targets increases with age, the later you start saving, the more discipline you need to practice for your financial goals in order to hit your target. In addition, it is also good to track your income, expenses, savings and targets.
The importance of saving early and compound interest cannot be stressed enough. So, start saving early and you may be able to retire earlier than you expected in the most expensive city in the world.