How to Save Early and Take Advantage of the Power of Compound Interest
- Saving early and regularly is the most powerful financial advice offered to young people by Katie Nixon, chief investment officer at Northern Trust Wealth Management.
- Starting early helps savers take advantage of compound interest, which essentially means that older balances and interest payments earn even more interest over time.
- It is costly to start late and then try to catch up.
It’s just two words:
According to Katie Nixon, understanding the power of this concept, and more importantly, implementing it by saving, is crucial to building wealth over time. the chief investment officer of Northern Trust Wealth Management, which manages $287 billion in assets. The company’s clients include 20% of Forbes’ 400 richest Americans, private companies and individuals.
Savings accounts are important for the inevitable rainy day and because they earn free money in the form of interest. And it’s there compound interest comes into play. Basically, letting a savings account grow over time ensures that interest is not only earned on the balance, but on old interest that has already been earned.
Recognizing the power of this concept in the long run is the best advice for a young person managing their finances, according to Nixon.
“That’s the most powerful answer I can give, which is to save as much as possible as soon as possible,” Nixon told Business Insider when asked for advice from someone just starting out. his career.
“Start saving and enjoy the benefits of the eighth wonder of the world, which is compound interest.”
The chart below shows the power of compound interest across three hypothetical people who started saving at different stages of their careers. It assumes that every person except the third (more on that in a second) puts aside $100 a month in an account with a 3% interest rate.
Obviously, the person who started the earliest, at age 25, had the most money at age 65. It also shows that it is costly – now and in retirement – to start late and catch up; the person who started at age 40 and saved twice as much fell behind the one who started earlier.
What about the stock market?
Investing in stocks is riskier than hoarding cash, but it’s a risk worth taking, Nixon said.
“We work with a lot of multi-generational families, and when we talk to some of our younger clients, who are 19 and 20, we give them this advice: don’t be afraid to invest,” she said. .
“Markets don’t go up every year, but over time they do. Make a habit of it and keep investing over time, and recognize that people who are young right now could potentially live well beyond 100 year.”
Warren Buffett, the most famous investor of this era, recommends keeping things simple, especially for people who don’t know where to start.
“My usual recommendation has been a low-cost S&P 500
“Said Buffett, the chairman of Berkshire Hathaway, in his 2016 letter to shareholders. Such an exchange-traded fund (ETF) would go hand-in-hand with the S&P 500 and spread the risk of betting among a handful of companies.