Forget about location, location, location being the key to a good investment outcome. For now, let’s think of the most important ingredient as being regular, regular, regular!
A regular savings plan can turn small amounts of money into a sum that can take you closer to your dreams much faster. All that’s needed is time and discipline.
For example, let’s see what happens to an investment starting with just $100 and adding $100 each week from your regular income.
to budget or not to budget
Think about what you might have to do in order to save $100 per week to add to your investment. Would you need to cook dinner at home for one extra night instead of going to a restaurant or ordering takeaway? Maybe you might consider borrowing books from the library instead of buying them; or reviewing your home telephone, mobile phone and car insurance to get a better deal.
It might sound picky, but in return for this discipline you can see what can be achieved:
- the $30,000 in 5 years might be a deposit on your first home or an overseas holiday for the whole family;
- the $71,000 in 10 years might contribute to your young children’s secondary or tertiary education; or
- the extra $300,000 in 25 years might help you to retire more comfortably or earlier than you thought you could.
Any of these goals would seem to make your small sacrifices extremely worthwhile in the long run. And remember to write down your financial goals as early as you can because it’s much easier to make those sacrifices if you know the actual goal they are helping you to achieve.
But remember that budgeting is not the only way to find a spare $100 each week. A good time to start a savings plan is when you are fortunate enough to receive an increase in your disposable income. This might be from a pay rise or a tax cut.
the trick is that the sooner you start, the less you need to save in order to achieve the same outcomes.
Elise plans to retire in 20 years from now and starts saving an extra $100 per week for this goal. She might expect to have an investment of around $200,000 to add to any other superannuation or retirement benefits she has at that time.
Elise’s brother Tim also plans to put down the tools in 20 years, but he is confident that he can save more money than his sister. So Tim ignores any type of retirement planning for the next 10 years. He then saves twice as much as Elise – $200 per week – for the last 10 years of his working life.
Assuming a 6% return on the investment, the difference is staggering. By starting 10 years earlier, Elise will have saved just over $200,000 compared to Tim’s outcome of $142,154.
Even though his regular savings amount totals exactly the same as his sister ($104,000 over the period of the investment), Elise has benefited from the compounding investment returns on her money over a longer period of time.
By starting her regular savings plan earlier, Elise has about 40% more capital with which to enjoy her retirement.
Another way to look at it is that Tim would need to save around $280 per week for the last 10 years of his working life (a total of $145,600) to end up with the same outcome as Elise.
The examples we have used here are aimed at highlighting the benefits of time and discipline when it comes to investing in a regular savings plan.
To keep things simple, we have not taken into account other factors that will impact on the outcomes you can achieve, such as taxation, fees and differing investment returns.
These factors are nonetheless important and will need to be considered when you are deciding on the type of investment you choose for your regular savings plan.
High-interest bank accounts, managed share funds and your superannuation are just a few examples of areas that allow you to implement a regular savings plan like the one we have examined here. The type of investment that is best for you will depend on your own specific circumstances, including your goals, timeframes and attitude to risk (volatility).