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Starting Early: Benefits of Compound Interest for Families

Updated: Oct 17, 2023

By Devon Ethier, CFP®, MBA,

Investment Advisor, iA Private Wealth


In the world of investing, time is a precious asset, and there's a magical force that can significantly amplify your family's wealth-building potential: compound interest. In this article, we will uncover the enchanting effects of starting early and harnessing the power of compound interest to secure your family's financial future.


Understanding Compound Interest

What is Compound Interest?

Compound interest is the concept of earning interest not only on your initial investment but also on the interest that accumulates over time. It's like a snowball effect, where your money grows faster as it accumulates interest on interest.

Kids working in the garden

The Magic of Starting Early

The Tale of Two Families

Let's explore the story of two families, the Early Starters and the Late Bloomers, to understand the power of starting early.


The Early Starters

John and Emily begin investing $5,000 annually in a tax-advantaged account for their child as soon as they are born.

They continue this practice for 18 years, contributing a total of $90,000.


The Late Bloomers

Michael and Sarah delay investing until their child is 18 years old.

They invest $5,000 annually for the same 18-year period, contributing a total of $90,000.


The Outcome

At the age of 65, when both children are ready to retire, they compare their accounts:

The Early Starters' account has grown significantly more due to the magic of compound interest.

The Late Bloomers' account has grown, but it lags far behind the Early Starters.


Benefits of Starting Early

  1. Maximizing Time - Starting early gives your investments more time to grow. The longer your money compounds, the more wealth it can accumulate. Even small contributions made early can outperform larger contributions made later in life.

  2. Smaller Contributions - When you start early, you can achieve your financial goals with smaller annual contributions. This can ease the financial burden on your family and make saving for future needs more manageable.

  3. Financial Security - Compound interest can provide financial security for your family. It can help fund your child's education, provide for a comfortable retirement, or create a safety net for unexpected expenses.

  4. Peace of Mind - Knowing that you've harnessed the power of compound interest can provide peace of mind. It allows you to face the future with confidence, knowing that your family's financial well-being is secured.


Practical Steps for Families

  1. Start Early - The best time to start investing is now. The earlier you begin, the more time your investments have to benefit from compound interest.

  2. Set Clear Financial Goals - Define your family's financial goals, whether it's saving for education, buying a home, or planning for retirement. Having clear objectives will help you stay focused on your investment strategy.

  3. Consistent Contributions - Make regular contributions to your investment accounts. Consistency is key to maximizing the benefits of compound interest.

  4. Diversify Your Investments - Diversification can help manage risk while seeking higher returns. Consider a mix of stocks, bonds, and other assets to create a well-balanced portfolio.

  5. Consult a Financial Advisor - Seek the guidance of a financial advisor who can tailor an investment plan to your family's specific needs and goals.

Conclusion

Starting early is the secret to unlocking the full potential of compound interest for your family's financial well-being. The magic of compound interest can turn modest contributions into substantial wealth over time, providing security and peace of mind. By taking the initiative today, your family can enjoy a financially enchanting future filled with opportunities and prosperity.


If you would like to learn more about investing for the long-term and the advantages of starting as early as possible, we are here to help. Call us today or Book here.

Devon Ethier, CFP®, MBA, Investment Advisor with iA Private Wealth, and Insurance Advisor* with Oceanside Wealth Management Ltd., can be reached at the iA Private Wealth office at 166 E. Island Hwy Parksville, BC by phone at 250-586-1332, by email at devon.ethier@iaprivatewealth.ca, or online at www.carolplaisier.com.


Disclosure

This information has been prepared by Devon Ethier who is an Investment Advisor for iA Private Wealth Inc. Opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada


*Insurance products and services are offered Oceanside Wealth Management Ltd., an independent and separate company from iA Private Wealth Inc. Only products and services offered through iA Private Wealth Inc. are covered by the Canadian Investor Protection Fund.

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