I was reading a book, this weekend called The Compound Effect. it illustrated the effects of forming some habits in (or as) part of a routine. The book was quite generic and did focus on exercise and life goals but ultimately it did highlight a prominent point that starting to do something regularly and a little bit, starting today, forms a successful habitual outcome.
As an expat, especially if you are younger the time to start saving in to a savings account, SIPP, investment account or something similar is now. We are now in a generation of ETF’s and you can get an average return of around 8-10% from the S&P500 ETF.
This can be transferred into several aspects whether it’s starting an exercise routine doing 10 minutes a day or reading a chapter of a book a day.
The same goes for saving. Saving a little bit now and using the effect as compound interest can have significant results when using the power of compound. I have heard 100s of excuses why I can’t save and came across countless people most of which are earning six figures in their 50s that have nothing saved. Here are some of the figures with the effect of compound interest to illustrate the power in regards to saving.
What is Compounding & The Compound Effect?
Compounding can easily be described as an interest on interest. You have 100,000 and get 10% (for easy maths), you get 110,000 that year. The next year if you add nothing to the pot, you will get 121,000, +11,000 and if you do this for 40 or so years, it will add up. See the picture below:
Paying an effect of 1000 dollars a month at just 5% interest per year will this will amount to and gross return of 412.746.31 from the 240,000 deposited showing a growth equals a growth return of 172,746. That is not bad at a safe rate of return. Think of what an extra 172,746 dollars can do for you.
But what happens if you started just 1 year earlier here is where the figure goes from 252,000 to 445,193.21 giving a difference of 194,193.21. Just one year of compound interest could be costing you 18,000 dollars a year, just for forming a simple habit of compounding. And go on one more year up this can be near 50,000 dollars while if you go up to 5 years before it can earn an extra 125,245.
Now ask yourself should I wait that 1 more year to save?
What To Focus On
Many who want to take advantage of the compound are unsure how to start and what to put their money in, the best way to get started is to start putting some money into the markets such as the S&P, and carry on putting in monthly amounts to keep it building.
It is always best to seek financial advice before you start investing and understand your risk tolerance. The market gives an average return over a year, please remember that it is an average, one year it might be down and the next year it could be doing double. AS you start to invest, please remember you are in it for the long term, which could be until you die because as you get more and more in the pot, the bigger and bigger the compound interest is.
If you want to talk about how you can start your compounding and investment process, please email us or use the chat below and read our articles below which may help with some more information!
you can achieve more if you wish from the market with not much more risk, however, it does take research to know the funds. However, if the advisor has sound principles then you can ask them which fund they think is good!
This can change and as an expat is worth re-assessing your portfolio and savings probably once every quarter!
