It seems like a pretty obvious idea: By starting to save in your 20s rather than your 40s, you’ll have more money by the time you retire. But research shows that only about 3 in every 5 Canadians – and just half of 25-to-34-year-olds – are actively saving for retirement.
On top of that, many Canadians are failing to save enough for their retirement years, leaving them in a position where they may need to work a lot longer than expected.1Footnote 1
Clearly, it’s important to save early and save often if you want to make the most of life’s opportunities and retire with confidence. On that note, here are 5 reasons you should start saving while you’re still young.
1. Compound growth can give your savings a big boost.
When you invest your money, you stand to benefit from compound growth, which is similar to compound interest. With compound interest, you’re essentially earning interest on interest – you earn interest on your original and subsequent investment contributions, plus on all the interest that has accumulated over time. This gives you a larger balance to earn future interest on, leading to even bigger returns.
For example, if you put $500 away today with a 6% annual rate of return compounded monthly, and continued making the same contribution each month for the next 40 years, assuming the same 6% annual rate of return, you’d end up with $1,000,724.2Footnote 2
To help you understand the value of compounding, consider how much money you’d have without the 6% compound growth: just $240,000, or about a quarter of the amount stated above. When you’re young, your options for investing your money are long term, and may include segregated funds, mutual funds held inside TFSAs and RRSPs.
Overall, compound growth represents the key difference between investing your money through a financial institution and shoving it in a shoe box under your bed. It’s what can help your money grow – in some cases, far beyond the amount you originally invested.
2. You can weather unexpected market events.
Even cautious investors can be affected by market downturns, which is another reason it’s so important to start saving early. It means that if the markets do experience a downturn, you have time to make up for it.
On the other hand, if a market change hurts you while you’re scrambling to save for retirement, it can be a lot harder to recover. To put this in perspective, imagine setting aside a large percentage of your income for retirement while also trying to meet obligations associated with a mortgage, a child’s post-secondary tuition, car loans, etc.
Additionally, investing smaller amounts over longer periods of time allows you to take advantage of dollar-cost averaging. Under this approach, you balance the highs and lows of the market by purchasing units at consistent intervals, rather than going all in when prices may be high.
Start saving early
Starting early is a great way to reach your long-term investment goals with the help of compound interest. #SaveEarly #SaveOften
3. It pays to be prepared.
It’s always a good idea to be prepared. You just never know when something will come along to fiddle with your financial forecast. From an unexpected career change to last-minute vacation opportunities, life’s all about surprises.
Putting money aside can help you handle these little emergencies without having to drastically change your financial plans for the future. But being prepared isn’t just about putting money into a savings account – it could also mean protecting your family through life insurance, critical illness insurance or disability insurance.
4. You’re setting a good example.
By the time they’re in their late 20s or early 30s, many Canadians are parents to young children. And one of the best lessons young parents can impart upon their children is sensible financial management.
In short, by being good with your money at a young age, you can help your children understand the value of getting an early start on saving and being organized when it comes to managing finances.
5. You’ll want to do more than just ‘get by’ in retirement.
Let’s face it, the last thing you want to do in your retirement is wonder ‘will I have enough?’ If you’re like most Canadians, you’ll want the opportunity to travel, spend time with family near and far and buy big-ticket items, like a boat or cottage.3Footnote 3
You may also want to help your children or grandchildren pay for their post-secondary education (such as through a registered education savings plan) and start their own families. By starting to save early, you’ll give yourself a better chance of reaching these kinds of financial goals.
A financial security advisor with Freedom 55 Financial can help you create a comprehensive financial security plan based on a mixture of savings, investments and insurance. So, do your future self and your loved ones a favour and begin thinking about tomorrow, today.4Footnote 4
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Working with a financial security advisor can provide you with the tools and expertise you need to plan for the future.