After the retirement reform we are going to retire later. This is a fact, and another quite feasible fact is that the amount of retirement pensions will not be comparable and, in fact, it will be very difficult to maintain purchasing power at the same level with the pension alone.
This implies that, for those people who are looking to the future, saving becomes an essential tool to look for complementary income that will allow them, in their old age, to live with peace of mind and without problems.
The beginning of all this has to do with the habit of saving. On many occasions we have spoken in this blog about the need to establish the habit of saving as soon as possible and to look to the future in this sense. The more we manage to save, and do it in a more fluid and solid way, the more financial peace of mind we will bring to our lives.
What is the snowball effect?
It’s really just a way of explaining what compound interest can do for us. Compound interest is nothing more than the sum of the capital we put into savings or investments and the return we get back into the market.
It is simple to understand. Let’s imagine that every year we are able to save 1000 € and this gives us a return of 100 €. If the following year we invest again only 1000 € we will obtain again 100 €. However, if the following year we invest the 1000 € plus the 100 obtained in the yield the profit would be higher, for example, 1110 €. Therefore, the second year we could invest 2210 € and so on.
As time goes by, the snowball grows as we have been accumulating interest and capital. Logically, this is a simplistic example since other factors such as commissions, expenses, etc. must be taken into account.
However, the compound interest snowball effect is a long-term saver’s best friend.
How to start saving
There is no magic tool that will allow us to start saving effectively. Everything is based on perseverance, a good choice of amounts and products, and, above all, a good knowledge of our personal finances.
It seems essential to be able to carry out a savings analysis based on the reality of our personal finances. Factors such as drawing up a good budget, being clear about the relationship between expenses and income and being able to optimize it, etc., come into play here.
In general, the recommendation is to start saving as soon as possible, the younger the better and with constancy and future projection.