Last Friday I had the pleasure of joining my fellow advisors Katelynn Toth, CFP®️ and Stan Moiseev in hosting our annual Pathfinder Webinar. This event was tailored to younger investors, and we discussed the valuable topics of compound interest and savings benchmarks. The following is a summary of our event; don’t hesitate to share this blog to those in your life who would like to learn more about investing early.
Many young folks are more than willing to start saving for their retirement since we (obviously) don’t want to work forever, but the questions around this can be puzzling. Thinking of how to balance saving for tomorrow while still enjoying today is just one of the many questions that isn’t easily answered by a Google search. Stan and Derek walked through the important topics of compound interest and savings benchmarks to help our audience further understand the importance of starting to save today, versus 20+ years down the line.
Interest plays a crucial role in the financial world. It represents the cost of borrowing money or what you will earn from lending money. The two types of interest covered in our discussion were simple and compound interest. The differentiator between these two is the calculation method. Simple interest only accounts for interest rate times the principal amount. On the other hand, compound interest involves the accumulation of interest into the principal amount. It is sometimes described as interest on interest. Because as interest is reinvested into the principal your earnings or debts are calculated based on this increased balance over time.
The growth between simple and compound interest becomes glaringly apparent over the long run. To let compound interest do the work for you, you need to stay the course. In other words: as your money grows, keep it invested and let the higher principal value continue to grow. Using compound interest calculators or concepts like the rule of 72 are great ways to see how you can apply compound interest to your own financial situation.
Another key point we discussed is the importance of starting young. If you choose to invest now, over time you will give your money time to grow in value. This allows young savers time to benefit from the magic of compounding, as opposed to delaying and losing out on years of growth.
Just as compound interest can work to your advantage, it can also be a disadvantage. Credit cards, for example, often employ compound interest when calculating outstanding balances. Since the average credit card tends to have higher annual percentage rates (APR) than what you can earn in the market, the burden of debt can accumulate rapidly. Although credit cards offer benefits like rewards, fraud protection, and the opportunity to build a healthy credit history, it is important to be aware of the risks.
In our financial journeys, we can often focus on earning more and spending wisely, but one critical point that often gets overlooked is the role of savings benchmarks tied to our age. These benchmarks can serve as guideposts to a secure financial future, especially during retirement.
Just as we set clear educational and career goals, it’s equally crucial to establish financial goals that align with your life stage. In your 20s and 30s, consider focusing on building an emergency fund that covers several months of living expenses. As responsibilities grow in your 30s and 40s, try aiming to save 15-25% of your income, whether it’s for retirement accounts or other investments. When you hit your 50s, shoot for increasing your contributions to retirement funds to benefit from the compounding that Derek mentioned. These benchmarks provide a roadmap for consistent savings, ensuring financial stability throughout your life.
Consistency in your savings approach is also vital, particularly due to inflation. The rising cost of living can erode your purchasing power over time, making it essential to save and invest wisely. Retirement should be a time for relaxation and cherishing the fruits of your labor, not a period of financial stress.
We aim to help empower the next generation in their finances. Feel free to reach out with any other topics you would like to see covered.
Associate Financial Advisor
Alaska Wealth Advisors, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Alaska Wealth Advisors’ investment advisory services can be found in its Form ADV Part 2 and/or Form CRS, both of which are available upon request. Material presented has been derived from sources considered to be reliable, but accuracy and completeness cannot be guaranteed.
Certified Financial Planner (CFP®) is licensed by the CFP® Board to use the CFP® mark. CFP® certification requirements include: Bachelor’s degree from an accredited college or university, completion of the financial planning education requirements set by the CFP® Board (www.cfp.net), successful completion of the CFP® Certification Exam, comprised of two three-hour sessions, experience requirement: 6,000 hours of professional experience related to the financial planning process, or 4,000 hours of Apprenticeship experience that meets additional requirements, successfully pass the Candidate Fitness Standards and background check, agree annually to be bound by CFP® Board’s Standards of Professional Conduct, and complete 30 hours of continuing education every two years, including two hours on the Code of Ethics and Standards of Professional Conduct.