The Power of Compound Interest: And Why It’s So Important to Start Young

Being Youth Month, I thought it only pertinent to focus on this month’s hot topic of conversation; Millennials. I am a Millennial (proudly so), and working in the Financial Services Industry has given me an incredible grounding of concepts that I see so many of my peers battling with. I am one of the lucky few with open access to advice and information, and it was this that motivated me to leave a career in cheffing to pursue Financial Services. I had no experience, but I saw an ever-increasing gap in financial advice tailored to suit younger clients, and I felt that so many young people could benefit from good, life changing advice.

Speaking to this point, I have come across a number of articles lately about Millennials and our innate lack of ability to save – my favourite so far was a rather comical piece, explaining that most Millennials will not be able to become home owners due to exorbitant spending on avocado toast and fancy coffees. Whilst these articles do elicit the occasional giggle, they also open the floor to a debate that I feel quite strongly about – are we doing enough to educate young people about the importance of not only saving, but investing and starting young?

It’s certainly not something we fail to bring up, but are our conversations geared towards giving tangible value to Millennials, when we speak to them about saving?

Let’s look at a quick example; two people saving for retirement (let’s call Investor A Anthony, and Investor B Betty), both contributing the same amount until the same age, with the same growth rate per year. Anthony starts saving at age 20 and the Betty starts at age 30. The difference in total deposits – R120 000. Difference in total value at retirement age – a sizable amount of R6 741 579. Compared to the end result, the extra R120 000 Anthony put aside is negligible.

Anthony is able to achieve this incredible result through compound interest. In simple terms, Anthony has an extra 10 years of his money earning money on itself! Looking at this, it’s no wonder Albert Einstein referred to compound interest as the eighth wonder of the world!

This divide grows ever more pronounced when we break it down in terms of income though – let’s assume Anthony and Betty have recently retired, the values shown above are what they have accumulated after 40+ work years, and they now need to use their investment savings to replace their income. Assuming they each draw 5% per annum (the industry suggestion and the standard to ensure capital preservation), the monthly income generated from their investments would be as follows:

Anthony – R44 041 per month

Betty – R15 951 per month

Difference – R28 089 per month

Imagine how much avocado toast and fancy coffee Anthony would be able to buy with an additional R28 000 per month! On a side note, I would take a comfortable bet that majority of people reading this assumed Anthony would have been able to draw a far higher income every month, considering the value of his investment.

That leads me back to my question, are we doing enough to educate and empower Millennials in this regard? Are we providing them the opportunity to feel and experience what they are saving for, and the ability to tailor make their solutions to fit their needs?

At Harbour Wealth we strive to make a meaningful difference to all of our clients by empowering them to understand their financial well-being. Utilising fintech, interactive dashboards and easy to use tools, our clients have a secure environment shared between them and their Harbour Wealth Planner, where they have everything at their fingertips to create a snapshot of their financial wellness and the tools to understand how small changes can make a big difference. Future proofing our business, and creating spaces where Millennials can upskill themselves financially, is just one of the ways we are investing in the future.

Feel free to contact one of our qualified independent Financial Advisers to guide and assist you.

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