A great saving strategy for the long term can be summed up as, “Save early and often.” Why do we hear the advice so often that it pays to start saving early? The key: compounding. Dividend or interest compounding is simply the idea that, as our savings earn interest or dividends, those earnings are added to our total, and the next dividend is calculated on our new total. As a simple example, say you invested $100 at 2.5% interest. When your interest is earned, you’ll add $2.50 to your $100, for a new total of $102.50. Then your next 2.5% interest is on $102.50, which is $2.56, added to $102.50 is now just over $105, and so on. If your account compounds monthly, the total is updated every month, and you earn more as you go.
To add to this strategy, we recommend in addition to your initial savings, that you add to your savings every month. Once again, the earlier you start the more months you have to save, and the more your savings will grow. As your life and career progress, the more you might earn enabling you to save more every month. All these factors can add up over time, with positive results.
Our graphical example shows that if you start at age 20, with even with a small initial deposit and relatively small monthly contributions, a smaller investment can yield you more over time than if you waited until you were 40, with a much larger deposit and twice the monthly contributions.
When Should You Start?
Everyone’s life is different, but the rule is to save as much as you can, as soon as you can, and keep up with your savings. Over time, compounding will reward you. Learn more about our Savings Account Options, and Save Smarter.