What will it take to save for your financial goal?

Perhaps you are saving for a dream holiday and visioning laying on your sun lounger, sipping cocktails. Or maybe you have your mind set on a deposit for a house or a new car and want to understand when you might be able to lay your hands on the keys. Or perhaps you are wondering what age you might be able to retire at and are looking at setting up a regular savings plan. Whatever the reason, help is at hand, so read on...

If you would like to know how much to save each month to reach your target in a set period of time, please reach out to your financial adviser to offer professional guidance on the right strategy for your own financial goals.

Effective strategies for saving

Once you have calculated how long you need to save to achieve your goal, your next step should be to figure out an effective strategy to make the most of the money you are putting away.

• What are you currently saving for and what challenges are you facing
• Where should I put the savings to maximise interest
• How can I make the strategy of saving as easy as possible

To ensure that you keep making the regular monthly amounts required to achieve your savings goal without accidentally missing a payment, consider setting up an automatic monthly payment from your deposit account into your savings or investment account. You can then rest easy that everything is taken care of so that you're sipping drinks on your beach or taking possession of your car or house keys just when you expect to, without having to save any longer to achieve your goal.

While young people are usually unconcerned about how they will fund their future, they are in the best position to capitalise on two important elements which can turn even small savings accounts into virtual money-making machines. Those two magic ingredients are time, which young people have in abundance, and compounding interest.

Compound interest is money earned on the interest earned by your original investment, or principal. It’s an amazing phenomenon, but one that is important for young people to understand, since they have the time needed to realize maximum earnings from compound interest.

Here’s an example of how it works. Megan, David and Kent will receive the exact same 7% annual investment return on their retirement funds. The only difference is when and how often they save.

• Megan begins investing $5,000 each year beginning at age 18 and continuing for 10 years. At age 28, she stops and never invest another dollar. Over that 10-year period, Megan set aside a total of $50,000. By the time she turns 58 years old, that $50K will grow to more than $602,000 – thanks to compound interest.
• David also invests $5,000 annually, but he doesn’t start until he is 28 years old. David works hard to invest $5,000 annually for 30 years! Even though he invests a total of $150,000, at age 58 his savings will amount to about $540,000. His nest egg earned $60,000 less than Megan’s because she had an additional 10 years to earn compound interest.
• Kent, on the other hand, starts investing early and keeps going. He begins investing $5,000 annually at age 18 and continues until he is 58. Kent invests a total of just $200,000, but because he began early, the interest he earns has 40 years to keep building on itself. By the time Kent reaches 58 years old, he will have more than a million dollars in his account.

It may not be surprising that Kent’s total is higher, since he saved money for a longer period of time. Consistent and, more important, an early start, allowed his savings to snowball.

But some people may be surprised that Megan’s account is so much bigger than David’s. After all, she stopped investing altogether after just ten years. David invested the same amount annually for 30 full years, but never caught up with Megan. That is the magic of compound interest.

If you are a young adult just starting out on your own, many expenses compete for your money. It can seem impossible to save for the future. But try to remember that early investment in interest-bearing accounts will give you a huge financial edge – no matter what you are saving for.

The keys to success

The above data demonstrates just how powerful time and compounding can be. These figures are attainable for you, too. The key is that you need to be proactive and have a plan in place to make it happen as soon as possible.

Arguably the biggest challenge is getting a working budget in place and sticking to it. Having a budget will allow you to assess your monthly cash flow quickly and accurately, which in turn gives you a better chance of optimizing your ability to save.

In order to stay accountable, you should do your best to surround yourself with people who share your goals to save. This means everyone under your roof should be onboard with a household budget, including your kids. It may not hurt to separate funds for certain categories, such as food and entertainment, from your checking account. If you have difficulty resisting the urge to spend, seeing excess cash in your checking account might justify a compulsive outing.

Remember, a little set aside now can make a big difference later in life.

Call or message me today for professional guidance on saving while you are working overseas.