Start Saving Early to Take Advantage of Compound Interest

Many physicians have very ambitious retirement income goals. If you hope to reach those goals, comprehensive financial planning is critically important. There are many different areas that will need to be shored up; emergency fund, disability insurance, life insurance (if you are planning for yourself and a spouse), tax planning, and an investment strategy just to name a few. Some of these items are necessary to ensure that if something negative happens during your career, you and/or your spouse may still be able to save the required amounts necessary to reach lofty retirement goals. Others are just generally good practice and will help you keep more of what you earn and achieve the required returns on your investments to reach ambitious goals. However, the two financial concepts that will potentially have the biggest impact on your ability to achieve your retirement goals; compounding interest and saving and investing as soon as possible.

Compounding interest is an incredibly powerful financial concept. It is fundamentally interest on interest and helps your investments grow at a faster rate than just simple interest. How does it work? Let’s say you make an investment, and that investment is supposed to pay you interest or a dividend. Instead of taking the interest or dividend payment as cash and sticking it in your pocket, you reinvest it back into the same investment. The next time that investment is designed to pay out interest or a dividend, it does so not only on the original principal investment but also now on the reinvested amount.

Think of it as a snowball you’ve started rolling downhill. As the snowball continues to move downhill, it grows in size and momentum. By the time you reach retirement, this investment-fueled snowball has hopefully grown big enough and has such tremendous momentum that it’s churning out the income you desire on the first day of retirement and the last. The longer you can take advantage of compounding interest before withdrawing the funds, the greater impact compounding interest can have in growing your investment accounts. That’s why starting to save and invest early is critically important.

Whether you have modest or lofty retirement income goals, you improve your chances of reaching those goals if you start saving and investing early. Not only does it give you a longer hill to roll your snowball down, it also allows you to compensate for changes in investment markets or your financial goals as you progress through your career and life.

Our experience has been that many physicians early in their careers struggle to save. Student loans, down payments for houses, and a general increase in their standard of living consume all their income even though they are making 5 to 10 times as much as they were during their residency or fellowship. It is critically important to find a balance between saving and spending. Create a budget to keep your spending reasonable and free up funds to start saving and investing as soon as possible. We can’t express enough how critically important this is. Even saving and investing a modest amount regularly early in your life can have a huge impact on your ability to reach your financial goals.

Jeff Witz, CFP® and David Zemon welcome readers’ questions.  They can be reached at 800-883-8555 or at witz@mediqus.com or zemon@mediqus.com.

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Investment advisory services offered through MEDIQUS Asset Advisors, Inc. Securities offered through Ausdal Financial Partners, Inc.,

5187 Utica Ridge Rd, Davenport, IA 52807 563-326-2064. Member: FINRA/SIPC. MEDIQUS Asset Advisors and Ausdal Financial Partners are independently owned and operated.

 

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MEDIQUS Asset Advisors, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.