What are the benefits of saving money early?
By Admin 2020/06/01
It seems like an obvious idea: By starting to save in your 20s rather than your 40s, you’ll have more money by the time you retire. But research shows that only about 3 in every 5 Canadians – and just half of 25-to-34-year-olds – are actively saving for retirement.
On top of that, many Canadians are finding it challenging to save enough for retirement, leaving them in a position where they may need to work a lot longer than expected.1
Clearly, it’s important to save early and save often if you want to make the most of life’s opportunities and retire with confidence. On that note, here are 5 reasons you should start saving while you’re still young.
Compound growth can give your savings a big boostWhen you invest your money, you stand to benefit from compound growth, which is similar to compound interest. With compound interest, you’re essentially earning interest on interest – you earn interest on your original and following investment contributions, plus on all the interest that has built up over time. This gives you a larger balance to earn future interest on, leading to even bigger returns.
For example, if you put $500 away today with a 6% annual rate of return compounded monthly, and continued making the same contribution each month for the next 40 years, assuming the same 6% annual rate of return, you’d end up with $1,000,724.2
To help you understand the value of compounding, consider the money you’d have without the 6% compound growth: just $240,000, or about a quarter of the amount stated above. When you’re young, your investing options are long term, and may include segregated funds, mutual funds held inside TFSAs and RRSPs.
Overall, compound growth represents the key difference between investing your money through a financial institution and shoving it in a shoe box under your bed. It’s what can help your money grow – in some cases, far beyond the amount you originally invested.
Even cautious investors can be affected by market downturns, which is another reason it’s so important to save early. It means that if the markets take a downturn, you have time to make up for it.
On the other hand, if a market change hurts you while you’re scrambling to save for retirement, it can be a lot harder to recover. To put this in perspective, imagine setting aside a large percentage of your income for retirement while also trying to meet responsibilities associated with a mortgage, a child’s post-secondary tuition, car loans, etc.
Additionally, investing smaller amounts over longer periods of time allows you to take advantage of dollar-cost averaging. Under this approach, you balance the highs and lows of the market by buying units at consistent intervals, rather than going all in when prices may be high.
It’s always a good idea to be prepared. You just never know when something will come along to change your financial outlook. From an unexpected career change to last-minute vacation opportunities, life’s all about surprises.
Putting money aside can help you handle these little emergencies without having to significantly change your financial plans. But being prepared isn’t just about putting money into a savings account – it could also mean protecting your family through life insurance, critical illness insurance or disability insurance.
By the time they’re in their late 20s or early 30s, many Canadians are parents to young children. And one of the best lessons young parents can give to their children is sensible financial management.
In short, by being good with your money at a young age, you can help your children understand the value of getting an early start on saving and being organized when it comes to managing finances.
Let’s face it, the last thing you want to do in your retirement is wonder ‘will I have enough?’ If you’re like most Canadians, you’ll want the chance to travel, spend time with family near and far and buy big-ticket items, like a boat or cottage.3
You may also want to help your children or grandchildren pay for their post-secondary education (such as through a registered education savings plan) and start their own families. By starting to save early, you’ll give yourself a better chance of reaching these financial goals.
So, do your future self and your loved ones a favour and begin thinking about tomorrow, today.4
1 “60% of Canadians saving for retirement, just not wisely,” MoneySense.ca, Oct. 27, 2015
2 Assumes $500 invested on the first day of every month over 40 years with no withdrawals, with a 6% annual rate of return, compounded monthly. Segregated fund and/or mutual fund fees will lower your rate of return. This example is for illustrative purposes only. 6% annual rate of return is based on historical S&P/TSX composite total return data. Past performance is not an indicator of future performance.
3 Heather Loney, “Canadians dreaming of retirement, but not actually saving for it: study,” GlobalNews.ca, Feb. 5, 2015.
4 A description of the key features of the segregated fund policy is contained in the information folder. Any amount that is allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value.