Saving may actually be more powerful in a low-interest-rate world, because it gives you the raw material to invest and, over time, lowers the amount of risk you need to take to get a good return. While everyone talks about their investing home runs, a string of less exciting singles is actually worth a lot more.
An interesting take on this appeared earlier this year on A Wealth of Common Sense, an American personal finance and investing blog written by a money manager with a sense of humour. His mantra, copied from Albert Einstein, says: If you can’t explain it to a 6 year old, you don’t understand it yourself.
Okay, most of us don’t have $ 3.8 billion to put down. But the article makes the point. Start with a little, add to it, invest conservatively and leave it alone. Even if you stop adding to it, you still come out ahead. The vital part is to have something to put aside.
The reason you win by starting young with just small amounts is that time is on your side. The longer you have, the bigger the pile you’ll amass. You get interest on interest, and even though the sum is smaller to start with, the passage of time and multiple compounding periods add to the money’s energizing power.
I’ve seen versions of the chart that accompanies this story. It’s in many personal finance books and is often trotted out in RRSP season at investment seminars. This one is adapted from JP Morgan Asset Management’s 2014 retirement guide.
The chart compares two savers, one who begins at 25 and puts $ 5,000 a year away for just 10 years. The amount may be on the high side for most first-job young people, but even at $ 2,500 a year, the strategy still works.
In the JP Morgan example, if you put aside the same amount every year, assume it returns 7 per cent, and leave the money alone, at 65 you’ll have more money than a 35 year old who started 10 years later but saved for 30 years, three times as long.
It’s hard to get that message across to young people, because to a 25-year-old, 25 years in the future isn’t very relevant, nor as much fun as living for today. No argument from me. I was much the same way and that’s the way it should be.
But keeping an eye on the future doesn’t deprive you of pleasure today; set aside a little and it will go a long way. Something like a payroll deduction makes it easy. You don’t miss what you don’t see.
Then you can let time work for you. You don’t have to be Einstein, or Buffett, to figure that out.
More columns by Adam Mayers
Adam Mayers writes about investing and personal finance. Reach him at email@example.com