The Chinese proverb ‘the best time to plant a tree was 20 years ago, the second-best time is now’ is now a familiar saying to many of us. It acknowledges that while we should arguably have taken action earlier, this should not prevent us from taking action now.

What impact does this idea have on investments? We have all heard of compound interest, but its real impact can sometimes be hard to comprehend. We understand that at 2.00% per annum, £100 becomes £102, which becomes £104.04, which becomes £106.12, and so on. Whilst a modest impact at first, when left for longer time periods compounding can quickly build large sums.

What is the impact of monthly saving in the long term?

Let’s say we stop buying a daily lunch of a coffee (£3), a pastry (£3) and a sandwich (£4). Over a month, buying no lunch would save £300, giving up only the coffee and pastry would save £200, and simply ditching the pastry would save £100.

If we choose to invest our new monthly savings in the UK stock market using the average annual return for the previous 60 years¹ of 5.50% (inflation adjusted and minus 0.80% for fees), what return will we see?

As a tool for saving large amounts of money, monthly contributions derived from arguably small sacrifices can be incredibly powerful. When combined with compound interest they can produce results that initially seem beyond reach.

“Compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t pays it.” Albert Einstein

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1. Dimensional Matrix Book 2020

Patrick Christie
Graduate Trainee Financial Planner – WealthFlow
Patrick.Christie@wealthflow.com

This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.

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WealthFlow Group Ltd. Registered in Scotland No SC635011. Registered Office: 10 Charlotte Square, Edinburgh EH2 4DR.

Head Office & Consulting Rooms: 10 Charlotte Square, Edinburgh EH2 4DR.

Mail correspondence to our Central Scotland Admin Hub: WealthFlow Group Limited, PO Box 14947, Grangemouth FK3 3AU.

Authorised and regulated by the Financial Conduct Authority

For your protection, unresolved complaints can be referred to the Financial Ombudsman Service.

To contact the Financial Ombudsman Service, please visit www.financial-ombudsman.org.uk.

WealthFlow Group Ltd. Registered in Scotland No SC635011. Registered Office: 10 Charlotte Square, Edinburgh EH2 4DR.