Anyone can be an investor, even if you don’t have much money to spare. Careful investing is a way to build wealth over time.
These days there are several ways you can invest small amounts. On some online investment platforms there is no minimum investment at all, and you can make tiny regular investments.
And if you save only a small amount but do it regularly, it’s surprising how your savings add up.
Let’s say you invest just $10 a week into an investment with an average return of 4% a year after fees and taxes.
After 10 years you’ll have nearly $6,400.
After 20 years you’ll have nearly $15,800.
And after 40 years you’ll have nearly $50,400 – which could make a big difference to your retirement!
If you can save twice as much – $20 a week – your final total will be twice as big.
To check other amounts, use the Sorted savings calculator. That calculator gives you results adjusted for inflation. But you can turn that off if you wish.
Note in the numbers above how 20 years of saving gives you much more than twice as much as 10 years. And 40 years gives you way more than twice as much as 20 years. That’s because of compounding.
When you earn returns on an investment, it’s great if you can ‘reinvest’ that money – leave it in the investment. Then, in the next year, you’ll get returns on those returns. And the year after that it will be returns on two years of returns. And so on.
Over long periods, compounding makes a huge difference. In our 40-year example above, you’ve invested for 2,080 weeks. At $10 a week, your total investments have been $20,800, but your savings come to $50,400. Compounding returns have way more than doubled your money!
In most managed funds, including KiwiSaver, your returns are automatically reinvested for you, setting you up to take advantage of compounding.
Even better in KiwiSaver
In KiwiSaver you’ll do better than the numbers above. That’s because the government – and your employer if you are an employee – add to your savings.
The savings of a typical employee in KiwiSaver will be roughly doubled by employer and government contributions. Where you would have saved $100,000 out of KiwiSaver, you will save about $200,000 within the scheme. That’s powerful stuff.
And the savings of a non-employee who puts in $1042 a year to get the maximum $521 government contribution will be multiplied by 1.5. What would have been $100,000 will be $150,000.
If you are an employee, and you can’t afford the minimum 3% contributions for a while, you can take a savings suspension but continue contributing a smaller amount directly to your provider. If you put in $100 through the year, the government will add $50.
The key to making small investments amount to something is to start investing now. The sooner you start the more time compounding returns can work their magic.
And the key to starting now is to set yourself a savings goal. It might be to save $10,000 for a better car in four years, or to save $100,000 for retirement.
If the goal is big, set yourself milestones to reach along the way, and give yourself a small reward when you reach each milestone.
One more thing: research suggests that if you tell others about your goal you’re more likely to achieve it.
Keep an eye on costs
It’s always important to check the costs of investing. High fees and other costs can eat into your savings total.
For example, you can rank all the defensive KiwiSaver funds by ‘lowest fees first’ and ‘highest fees first’. In mid 2020, their fees ranged from 0.3% to 1.5%.
All of these numbers might seem small, but they matter. Let’s say both those defensive funds earned a return, after tax but before fees, of 3%. After fees are deducted, the lowest fee fund has a return of 2.7%, but the highest fee fund has a return of 1.5%.
How much does that matter? If you had a total of $200 going into the fund every month for 30 years:
In the low-fee fund you would have nearly $111,000.
In the high-fee fund you would have nearly $91,000.
That’s $20,000, or 22%, more. And over 40 years the gap would be even bigger – $41,000 or 31%. Especially over long periods, fees matter a lot.
You might be saying, 'Yes, but if I pay a higher fee I would expect to get a higher return.' Much research shows, though, that high fees are no more likely to give you high returns than low fees.
This content is reproduced from ‘Hits and Myths: an introductory guide to investing by Mary Holm’.