Time is paramount when it comes to financial investing. Start now so that you can reap the rewards of compound interest.
Compounding is when the interest on a sum of money is added to the original amount plus the accumulated interest so that the interest earned yesterday, earns interest today. It would be like pressing your bets at TLC188.
Essentially, the earlier and more regularly you start saving over the long term, the more the overall amount of money saved will come from growth, not only your contributions. It can be deduced that your initial contributions are far more important than the ones you make at later stages because you’re giving the investment time to grow.
Time can also be your foe
However, time can be a double-edged sword because the inherent value of money decreases over time as the cost of living increases; you’re unfortunately going to be able to buy less with the exact same amount of Dollars – this is known as inflation.
In order to counter inflation, your investments need to earn returns that meet or are higher than the rate of inflation. It’s important to note that more often than not, a large amount on your return on investment counterbalances inflation first and therefore returns ought to compensate for the time horizon of your investment in order to maintain buying power.
Here’s an example to illustrate the above-mentioned statements. If the rate of inflation is 7% per year, your investments have to grow by more than 7% each year before you’ll attain a real return. So, if the investment growth surpasses the inflation rate, then more buying power will be created.
In summary, when evaluating returns, it’s key to look at the real return, not the nominal return (which is the growth on your investment before the effects of the inflation rate are taken into account.)
Time in the market versus timing the market
It’s important that your decisions about when to start saving money are not swayed by market conditions. Yes, you may receive better value-for-money when the market has fallen. However, it can be very difficult to predict what will happen next. Essentially, the cost of putting off saving exceeds the benefit of starting as early as possible.
When should you start saving?
The sooner you start saving, the more time you give the investment to earn interest through compounding. In order to get the optimal benefits, you need to be strict and not spend the returns that your investment makes before reaching your financial goal.
It needs to be reiterated that the prerequisite for an investment to be successful is to adopt a long-term investment strategy.
The trade-off is whether you choose instant or delayed gratification; it’s essentially a situation of cause-and-effect: If you decide to use credit you will have to pay for the benefit of instant gratification. In contrast, if you choose to save, you will be rewarded by seeing significant growth in your investment.
Taking all of this into account, it can be reasoned that you’ll significantly improve your financial situation if you start investing sooner than later. If you are finding this all a bit daunting, enlist the services of an independent financial advisor; he/she will be able to help you draw up a strategy based on your financial goals.