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Spend, Save or Magic?

Chris Morcom
Partner/Private Client Adviser
20 Oct 2011

When thinking about investment it is easy to get caught up in the day to day, minute to minute information overload – the Dow Jones is up or down, the All Ordinaries is up or down… does it really matter in the long run?

When we talk about the long term, we often gloss over the impact of compound earnings?  This is the “magic” by which long term wealth is accumulated.  Simply put, it earning interest on interest.

Consider the difference between two examples:

  1. James has heard about compounding returns, and so saves $100 per week from age 20 to age 60. He invests his savings into a diverse portfolio of investments.  He earns an average net return of 8% per annum on those assets over the 40 years.

By the age of 60, James has accumulated $1,450,000 in his investment portfolio – the equivalent to $445,000 in today’s dollar terms with inflation at 3% over the 40 years.

  1. Richard is more of a “spend now, save later” kind of guy.  He wants the new iPhone, latest car and nice clothes, and so doesn’t start saving until he is 40 years old.

If he saved $100 per week from age 40 and invested in the same investment as James, he could only accumulate $256,000 in his portfolio by 60, which would be the equivalent of $78,000 today.

To accumulate the same amount as James, Richard would have to invest $565 each week for 20 years from the age of 40.

Are you a spender or a saver?  What impact is your savings habit having on your long term financial security?  Is it worth gambling your financial security on your future capacity to save?

It is never too late to start a new habit, particularly a good one.  Perhaps today might be the best day to start your new savings habit.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.