19th May 2015 at 3:08pm
Financial benefits of hindsight
To quote the famed Hollywood director Billy Wilder, “hindsight is always 20/20”. Even David Beckham has declared its merits, proclaiming “hindsight is a wonderful thing”. What they are both commending is the clarity with which you can look back on past events now you’re in the privileged position of being able to see what resulted from them.
When you take hindsight into consideration you realise just what benefits can be gained from listening to the experiences of others. We thought we’d tap into this rich vein of knowledge by going out and asking some financial bloggers what advice, in hindsight, they’d give savers today. Could any of these tips provide real financial benefits?
A bloggers view
As the feedback rolled in we saw a definite theme developing – start saving early.
Clive, who writes under the blogger title of ‘Take it easy: Retired not expired’, gave us an interesting insight based on his personal life experiences. “I wish I’d known how much effect unexpected changes in life would have on my retirement planning. I got divorced seven years ago and no longer have any investment in the family home. But as I’d been paying into my pension since I was 21, at least I could retire last year and have a fair standard of life. I’d have been lost without the pension!”
Julia of ‘Julia’s Place’ provided shrewd comment. “Putting a little away each week or month when younger is not hard, it’s surprising how quickly it mounts up from a nest egg to a nest.”
“Putting a little away each week or month when younger is not hard, it’s surprising how quickly it mounts up from a nest egg to a nest!”
As well as some fascinating hindsight from our older bloggers, we had some encouraging foresight from younger ones. US blogger Andrew, co-owner of Money Crashers Personal Finance, advises his peers that “young adults wanting to financially prepare for retirement should begin saving for it as soon as possible to take advantage of interest to significantly improve savings”.
The growth formula that adds up
So why does starting to save early matter so much? The answer is interest – or compound interest to be more precise. Even Einstein proclaimed its merit, the great man allegedly went as far as to call compound interest the eighth wonder of the world.
Simply put, compound interest lets you earn interest on any money that’s already grown. That means you get interest on your investments, which grows them, and then you get further interest on
that growth. Over time, it can really make a big difference to your pension, investments or savings – although there’s no guarantee these will grow.
Here’s an example; if you have £100 and invest it, any growth is applied to the £100. In the next year, any growth is applied not only to your original £100, but also to the growth that you reinvested. This happens year on year and a ‘snowballing’ effect can occur – every year the impact is slowly magnified.
If you’ve got investments, to see the true benefits of compound return it’s important to give them time. The stock market experiences peaks and troughs, so by thinking long term your investments have some resilience to cope with any market turbulence and are more likely to earn that all-important compound return. American investor Warren Buffett, one of the richest men in the world, has said that his preferred time to hold a stock is, “forever.”
“I wish I’d known how much effect unexpected changes in life would have on my retirement planning. I got divorced seven years ago and no longer have any investment in the family home. I’d have been lost without the pension!” – Clive, blogger
Think about the next generation
Saving earlier takes the pressure off how much you need to save later. Once the mortgage and kids come along surplus income for saving can be in short supply and get neglected, or just the bare minimum is paid. The positive news is saving money can feel just as good as spending it, setting off that feel-good factor and encouraging the savings habit. Having started early, you’ll build up money which could help you and your family at every stage of your lives including school, university, buying a home and funding the retirement you want.
If you have children or grandchildren why not help start the savings ball rolling for them when they’re very young? Junior ISAs are tax-free savings for the under 18s but there are pros and cons.
They can access these savings at 18, perhaps to help them through university or a gap year. However, the money is theirs and for some there are concerns about giving a large sum of money to someone without the life experience to manage it.
You could set a pension up for your child or grandchild and pay up to £2,880 into it every year. Whatever you pay in, the Government will top it up by 25%. The pension will have many years to grow and benefit from compound return, although it’s worth remembering that the earliest they can access their pension pot is when they reach 55. So, if you’re in the fortunate position to help a loved one kick off on their saving journey or maybe just pass on a little hindsight of your own, the save early sentiment is a sound one.
The information in this blog or any response to comments should not be regarded as financial advice. A personal pension is an investment. Its value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in May 2015.
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