Chapter 3. When Should You Start Saving?

FIRST THINGS FIRST: before you start investing, look at your debts. The interest you pay on debts is normally much higher than the interest earned on savings, so it’s usually best to pay off credit cards, store cards or loans before you start putting money away.

Once your debts are cleared, prioritise building up an emergency fund saved in cash. Nobody knows what the future holds, so make sure you’re prepared for a stroke of misfortune – losing your job, for example. Ideally, over time, you should build up your cash savings to cover six months of essential outgoings. In practice, though, covering three months of outgoings is probably sufficient.

You have to be able to take your money out as soon as you need it, so put it in an instant access account. The interest you earn will be lower than on, say, a 90-day notice account, but remember, this is an emergency fund and you need the flexibility.

OK, so you’ve paid off your debts and you have some cash to draw on in an emergency. You’re now ready to invest in the stock market. And don’t delay, because the sooner you start the better. Why? Because the longer you invest for, the more you benefit from what’s been described as the miracle of compounding.

Take Warren Buffett, for example. Buffett is one of the richest people in the world and one of the greatest investors of the modern era, and he bought his first stocks at the age of 11.

On his 60th birthday in 1990, Buffett’s net worth was close to $4 billion, according to the Forbes 400 list. By the time he turned 90 in 2020, Buffett’s net worth had skyrocketed to more than $70 billion (and that’s after he gave away tens of billions to charity). That means nearly 95% of Buffett’s net worth was created after his 60th birthday.

We’ll come back to this after we go through a simple example.

Most investment calculators offer you fairly simple inputs. You enter the amount you currently have saved, your future saving projections and a return assumption. Then the calculator spits out a future value based on those assumed inputs.

This isn’t a perfect way to determine exactly how much money you will have saved up by retirement because life doesn’t work in a straight line. Investment calculators are clean while the real world is messy.

Planning for long-term investment growth is more about accuracy (the ballpark) than precision (the bullseye), but running the numbers can at least give you a general idea of how your savings habits can impact your ability to generate long-term wealth.

With that in mind, here are some basic assumptions for a hypothetical young person with a long time horizon ahead of them that you might see in a typical retirement calculator.

Let’s say you begin saving at age 25 with a target retirement age of 65. You start saving 12% of your annual income of £40,000 and your income grows by 3% a year.

So how much would our hypothetical investment calculator saver end up with in this situation? Starting at this early age of 25 and with a high savings rate would net more than £1.5 million by the time you retire at age 65.

Starting Age


Retirement Age


Annual Returns


Annual Raise


Starting Salary


% of Income Saved


Total Saved


Ending Balance


% from Saving


% from Investing


You can see that a steady diet of a double-digit savings rate coupled with decent investment returns and a healthy dose of compound interest can turn our hypothetical saver into a millionaire by the time they retire.

Looking at these numbers would lead you to believe that your investment returns carry the bulk of the load and that investment returns are the thing young investors should focus on, because three-quarters of our saver’s ending balance comes from compounded investment gains. But breaking out these results by different periods tells us a much different story.

Here’s how things look by age 35 if you were to start saving at 25:





% from Saving


% from Investing


As you can see, in the early years, the amount of money you put into your retirement account drives the bulk of your ending balance. It is saving, not investment returns, that is driving you forward.

Now here are the results by age 45:





% from Saving


% from Investing


It took more than 20 years for the investment gains to catch up with savings in terms of the contribution to the overall balance.

Here’s a little secret about the compound interest that you cannot see in a retirement calculator – the majority of the growth comes once you build up a large enough balance as you get closer to retirement age. You can see this in action from the change in value over the final ten years of saving and investing:

Balance at age 56


Balance at age 65


The gains from investing in the last ten years in this example (age 56 to age 65) amount to £660,000, which is more than 40% of the total ending balance.

This is where the Buffett example from the above comes into play. Obviously, it’s a bit of an unfair comparison because the Oracle of Omaha is one of the richest people on the planet. But both Buffett’s growth in assets and our calculator example show how your money grows slowly until it builds upon itself and then explodes higher as compound interest takes off.

Real wealth for normal retirement savers comes from a combination of saving, compounding and sitting on your hands. No, not investment returns. Saving, compounding and sitting on your hands.

It takes time and it’s not easy. It could take decades to see extraordinary results, which is much longer than most people would prefer. Saving is more important than investing, but saving is boring while investing is sexy.

A few more lessons from this basic example:

· It’s more exciting to focus on milking a few extra percentage points of investment returns out of the financial markets, but the amount you save in the first few decades of your career is far more important than your investment strategy. As life expectancy continues to increase, the virtue of patience and an understanding of your time horizon become more important than ever.

· Increasing the savings rate on your income in this example from 12% to 15% has nearly the same effect on the ending balance as increasing investment performance by 1% per year. A savings rate of 20% instead of 12% equates to more than 2% a year in market returns. Earning higher returns on your investments is much more difficult than saving more money. You actually control your savings rate while no one controls what happens in the markets.

· Deconstructing compound interest into different time frames can help illustrate the power of sticking with a long-term saving and investment plan. It may seem like every tick in the market is going to make or break your portfolio, when in reality the simple act of saving more money over the long run can have an enormous impact on the size of your wealth.

· One study found nearly three-quarters of long-term investment success can be attributed to an individual’s savings rate while the rest was explained by asset allocation and investment selections. For the majority of the population, saving is more important than investing.

It doesn’t matter if you’re the second coming of Warren Buffett if you don’t save money. It takes money to compound money. Saving always comes before investing. But why should you save with the intent of investing in the first place?

The next chapter tackles this question.

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