Why is ‘NOW’ always the best time to start a Financial Plan and what does it have to do with maths?

The answer is compounding, or the compound interest formula.

More formally:

FV = P*(1+r)t

In arriving at your Future Value (FV), you can’t necessarily control your starting point (Principal, ‘P’). You have an amount available to invest – it is what it is.

You certainly can’t control what markets and the economy will do (Rate, ‘r’); they are too big for anyone to control despite the best efforts of central bankers and treasury officials.

BUT, you can control when you start investing and how long you give yourself to have compounding working for you rather than against you, ie Time, ‘t’. You will note that is an exponent, which means ‘to the power of’, and in this case explains the power of the one variable you can control, Time.

An example can demonstrate the cost of delay.

Parents of newborn twins decide to invest £1,000 for Child 1 on their date of birth, and £1,000 on the tenth birthday of Child 2. In calculating how much Child 2 has been disadvantaged by this egregious investment decision one might be tempted to see what the initial 10 years have done to the money.

For simplicity, I am going to assume a steady net growth rate of 7% on both investments. This closely estimates a doubling of the amount invested every 10 years (see proof below).

So Child 1 will have their investment account double to £2,000 on their tenth birthday, just as their parents are making the £1,000 investment for Child 2. Is Child 2 worse off by £1,000?

Why don’t we roll forward to when the twins are 60 years old and compare their investments?

Child 1’s investment has doubled 6 times, whereas Child 2’s investment has doubled 5 times due to the initial deferral. That doesn’t sound like much of a difference.

At 60 years old and perhaps closing in on retirement, Child 2 is actually £32,000 worse off. Clearly the earlier you start, the better off you will be. And you can’t start any earlier than NOW.

Reach out for a free consultation to talk about how we can help you get started with your Financial Plan and make regular good decisions that compound over time.

Adrian Johnson

Permanent Wealth Partners

Phone +44 (0)20 3928 0950

Email adrian@permanentwealth.co.uk

LinkedIn www.linkedin.com/in/adrianwjohnson