The longer you save, the less you have to…
While Einstein may have been falsely attributed with saying that the power of compounding is the eighth wonder of the world, he would probably agree. Due to compounding growth, R60 000 saved over ten years can be more valuable that R150 000 saved over 25 years!
This is because the earlier you start, the more time your money has to grow, with the help of compounding.
For example, if you save R500 from the ages of 25 to 35 years old and then stop contributing, leaving the money in a market-related investment earning 12% on average per year, you will have nearly R2 million by the time you turn 60. Over ten years, you would have contributed R60 000 and the rest of the growth is all due to the power of compounding.
In comparison, if you started saving R500 per month at the age of 35 and continued to save R500 for the next 25 years until the age of 60, you would have contributed R150 000, but you would only have R939 000.
Here is how it works: if you started saving R500 per month at the age of 35 and continued to save R500 for the next 25 years until the age of 60, you would have contributed R150 000, but you would only have R939 000.
In this calculation a 12% return per year was used. This is what is expected from the markets over the longer-term. At this rate, your money doubles every six years.
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The early saver
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The late starter |
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Age 35 |
Savings = R115 000 No more contributions |
By age 35 savings = 0 Starting R500 per month |
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Age 41 |
Savings = R230 000 Money has doubled |
Savings = R53 400 Only the first R500 has had time to double
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Age 47 |
Savings = R460 000 The value has doubled from R230 000 |
Savings = R160 000 Only R53 400 has had time to double |
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Age 53 |
Savings = R920 000 The value has doubled again from R460 000 |
Savings = R373 000 Only R160 000 has had time to double |
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Age 59 |
Savings = R1 800 000 The value has doubled from R920 000 |
Savings = R800 000 Only R373 000 has had time to double |
Understand Inflation
Remember that this amount does not take inflation into account, and so it is not R2 million in today's buying value. By that time, R2 million would buy you the same basket of goods that R658 000 would buy you today - assuming inflation is around 5%. But even so, just by starting to save early you can grow R60 000 to R658 000 in today's value – that is your money working really hard for you.