Tip 5 — Start early

It’s tempting to put off planning for the future, or to think that you don’t have enough to get started. However, it really is a case of the sooner you start the better. Just putting a small amount aside each month now, can make a massive difference to your future.

People often think that they need to have large amounts to begin investing. The good news is this is no longer true and there are plenty of options out there that allow you to begin investing from just a few pounds each month. You can also benefit from compounding and pound cost averaging.

Compounding

Compounding applies when the earnings you receive on your savings (interest if it’s in a bank account, dividends on shares) are reinvested to generate additional earnings. This quickly begins to add up as you start to earn interest on your interest.

The chart below is based on an initial investment of £5,000 with interest of 5% each year and shows the power of compounding over the long term:

Pound cost averaging

Investments can rise and fall in value and trying to time the market — investing when prices are low, selling when they’re high — is almost impossible to achieve. It can also cause significant anxiety and stress.

Pound cost averaging means investing a small amount on a regular basis. This helps to reduce the overall volatility as you’re buying regardless of the market position. If you invest regularly over the long term, you’ll capture the average return of the market. It can also help remove some of the emotional impacts of investing.

The impact of starting early

To help show the benefits of putting money aside as soon as you can, we’ve looked at a couple of case studies:

Isla — age 20

Isla sets up a Stocks & Shares ISA at 20.

She makes regular contributions of £100 per month.

By age 60 she’s contributed £48,000.

Assuming the plan grows by 5% a year, the value at age 60 is £153,643.

Meaning that her investments have grown by £105,643!

Pete — age 40

Pete doesn’t start to put money aside until he’s 40.

He can afford a bit more than Isla so starts investing £200 per month into a Stocks & Shares ISA.

By age 60 he’s also contributed £48,000.

Assuming growth of 5% each year the value of his plan at age 60 is £82,646.

This is over £70,000 less than Isla’s plan.

Whilst starting early may seem like a big commitment, assuming you have your basics covered it really can make an enormous difference.