The Importance of Starting to Save Early
Compound interest rewards those who start early: why every year of head start counts, with examples to prove it.
In finance, we often hear the advice: “Save early, invest as young as possible, or as soon as you can.” There is also a well-known saying on the subject, taken from a Chinese proverb:
The best time to invest was 20 years ago. The second best time is now.
But why do we place so much importance on saving as early as possible? The main answer is simple: to take advantage of the concept of compound interest
Compounding means reinvesting the earnings generated by our investments to earn additional returns.
At first, the effect may seem minimal, but over time it becomes significant and considerably increases our wealth.
Imagine two people: one starts investing at 25 with small contributions, while the other waits until age 40 but invests larger amounts. Despite the larger contributions, the second person accumulates less than the one who started early, demonstrating the power of time.
As the table below shows, starting to invest early really pays off. For example, a contribution of $200 per month, with a 4% annual return, reaches about $37,000 after 10 years, $91,000 after 20 years, and nearly $128,000 after 25 years.
As I said earlier, the best time to invest was 20 years ago. The second best time is now.
If you ever need help managing your savings, or if you would like to review your investment strategy, don’t hesitate to book an appointment with me!
Sources: RBC
Have a great week!
Where to start, concretely?
In my view, what matters most at the beginning is not the amount — it’s the habit. An automatic transfer to your savings account every payday, even a modest one, often makes all the difference. You don’t spend what you don’t see!
From there, the idea is to gradually increase your contributions over time, for example with each pay raise. Since the effort grows with your means, you barely feel it — but your savings certainly notice.
RRSP, TFSA: allies that amplify your efforts
Saving early is good; saving early in the right vehicle is even better. An RRSP can allow you to defer tax and grow your investments tax-sheltered until withdrawal, while a TFSA allows tax-free growth and withdrawals.
The right choice — or the right mix of the two — depends on your income, your projects and your time horizon. Every tax situation is unique: this is exactly the kind of question worth validating with your advisor or a tax specialist, depending on the case.
What if you didn’t start at 25?
Don’t panic: the proverb applies to everyone, and the second best time is still now. Higher contributions, unused contribution room to catch up on, and an investment strategy well aligned with your goals can help you make up for lost time, at least in part.
One important reminder: the figures in this article are provided for illustrative purposes only. Returns are not guaranteed and the value of investments can fluctuate — which is precisely why a strategy suited to your risk tolerance and time horizon matters.
If you want to put the power of time on your side, the Pérennité team and I are here to help: contact us whenever you’re ready.
