A brand new year is a fantastic time to make some long lasting changes to your finances.
However, the problem with financial planning is that despite your best resolutions, life often seems to get in the way. As a parent, there are many different roles to juggle, and immediate needs and responsibilities are usually at the front of the queue when it comes to handing out the cash.
Any of the following ring a bell?
- I would love to start a pension, but it’s hardly worth it with the amount I can afford to pay in.
- I have no idea how I can afford to put my child through university/build up a deposit for a flat/pay for my daughter’s wedding.
Compound Interest is your new BFF
The good news is that thanks to ‘compound interest’, saving a relatively small amount of money over a long period of time can actually make a significant difference to your life.
What is Compound Interest?
It is the effect of getting interest on your interest. The effect could be likened to the ‘Snowballing effect’ – the bigger it gets, the bigger it gets, the bigger it gets…..
How much difference does it make?
It makes an enormous difference. Also, the longer the money is invested the more of a difference it makes.
Start making a payment to a Personal Pension Plan
- If you pay £32 per month into a pension plan, the government will top it up to £40 per month (this is called tax relief).
- If you are age 25 now, and you pay £32 per month into your pension plan, you will have paid £19,200 into the fund by the time you are 65. However, the value of the pension fund should be around £106,012**.
Bearing in mind the average pension fund in the UK at age 65 is less than £25,000 – this demonstrates the power of investing over a long period of time, hand in hand with the effect of compound interest.
Make things easier for yourself with forward planning
One example of a significant future commitment could be University fees. From September 2012 universities and colleges in the public sector in England can charge new full-time students up to £9,000 a year.
Finding that kind of money out of income is nigh on impossible for most people.
However, using your new BFF – here’s how it can be done. If you save £40 per month over 18 years – depending on the level of investment growth, this could build up to around £18,217**.
Structured Savings for 2012
If you can afford to save anything at all on a monthly basis, if you do it for a long period of time it is always worth it.
Is there something you could give up or go without in 2012? Put that into a savings pot and you could surprise yourself.
*Assumptions – 7% growth rate, 1% pa annual pension charge.
*Values can go down as well as up. Fund values could be higher or lower than those quoted above.
Henrietta Oxlade is an Independent Financial Planner with Radcliffe & Newlands and MyFamilyClub’s in-house finance sage! She has been advising individual clients since March 1988, which is why many of her clients consider her part of the family. If you want to get in touch with Henrietta, email us on [email protected] and we’ll put you in touch.