Some Guidance On Growing Your Savings

 Some Guidance On Growing Your Savings

Saving a significant sum of money is hard. If you are lucky you may be born to wealth, if you are entrepreneurial you may make a tidy sum, or you might just be lucky. Many people go through life with no savings, and at some stage wish they had made provision for difficult days or their old age. To save a significant sum of money takes perseverance and this article is to give you encouragement.

From your first pay packet you should try to set aside say 10% of your income, always difficult as there are a never ending series of demands for your money through life. Consider placing savings slightly out of reach into say an online investment portfolio as you will then have to make a conscious effort to spend your savings.

Pay off debt as fast as you can, including a mortgage, and especially credit card debt which has a high rate of interest. Debt is negative investment, and once you are rid of it you can really start to save.

Invest your savings carefully so as to get a return which will beat inflation. Avoid speculation which eventually goes wrong, and be careful about having too much in shares, even though they are best for capital growth (they are volatile and have and will see large falls).

Invest tax efficiently say through an ISA, so you reduce the impact of tax. A 20% cut out of investment income is significant and avoidable.

Always keep costs down and search out effective and low cost ways to save.

These are the key principles to saving. Persevere and perhaps after 20 years you will have a decent sized portfolio. For some encouragement and tunnel light here are some mathematically oriented items for you to ponder.

If you save 10% of your annual income for 10 years then you have saved a year of your income. Hopefully your annual income will grow (and of course the demands placed on you will increase as well).

To have an idea of how long it will take to double a sum of money at a given rate of investment growth refer to the Rule of 72:

Divide 72 by the annual rate of growth for the number of years to double a sum of money. Say your average investment growth rate is 6%, then 72 divided by 6 is 12 years. At a 10% investment growth rate it will take 7.2 years to double your money.

The rule of 114 applies to tripling money, and the rule of 144 applies to quadrupling money. The magic of compound interest means the longer you invest the faster your savings grow.

You should save regularly and as a matter of routine. It is helpful to look ahead to see how much you might have saved in due course. Some mathematics are needed which fortunately are not too difficult. To work out the future value of a regularly saved sum of money at a particular interest rate use the following formula:

Amount x (1+r)^n-1 / r

Amount is the annual amount you are saving.
r is the rate or interest expressed as a hundredth. 6% is 0.06
^ is to raise to the power of. 3^3 = 9 (3x3x3). Use the caret hat symbol in a spreadsheet.
-1 is to make the top line result comparable to the format of the bottom line

As an example you are saving £1000 a year and your interest return is 6% what might you have saved after 10 years?

(1.06)^10 = 1.7908477
1.7908477 -1 = 0.7908477
0.7908477 / .06 = 13.18 (this is the factor you multiply the Amount by)
£1,000 x 13.18 = £13,180.

Note the above strictly speaking is the value after receiving the 10th payment in nine years time, but it is good enough to see the result.

Here is a spreadsheet formula extracted from LibreOffice Calc for you to play with (should work with most spreadsheets):

=((1.06^10)-1)/0.06

Now apply this to a 20 year term and you should get £36,785. That is the magic of regular saving and compound interest.


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