Saving for the Future

Our financial goals change as we move through life. In our 20s and 30s, we often build up debt to pay for expenses such as our college education, buying a home, or our children’s college education. 
While these goals may be deposits in our future well being, any loans taken out to achieve them have to be repaid. By the time many of us manage to pay off this debt, we are in our 40s and 50s. Now we are faced with a new financial goal: saving for our retirement.

With some basic skills in personal budgeting, you can identify opportunities early on to save for some of these future expenses. It’s important to set up a savings plan. Together with a personal budget, a savings plan adds discipline and helps you save for the future.

If you’re mired in debt to where you can’t think of saving, you shouldn’t despair. A debt repayment plan can help you chip away at your debts.

Repayment plan
A repayment plan is a systematic plan you use to repay debt. First, review personal budget and personal cash flow to see how much you can pay on a periodic basis. Next, pick a period in which you want to repay the debt. Finally, calculate a monthly payment. While repaying one debt, you want to avoid increasing your other debts. That will only prolong the time that it takes to repay, and will discourage you. In other words, a repayment plan also requires spending discipline. For example, you may aim to repay a $1,000 debt in 12 months. A debt repayment plan is also helpful in repairing your credit.


Once debts are repaid, you will eventually free up financial resources to save for the future. Saving is the cornerstone of paying for future financial goals. A good savings plan means making regular contributions, and not just a single, lump-sum deposit. The following table shows future values of a savings account for a range of monthly contributions. An initial deposit of $1,000 gets the account started. The account grows at 5% a year, compounded monthly. Although 5% is high by current standards, the rate is reasonable by historical standards and helps make the point about the power of compounding. This example is hypothetical only and does not represent any specific product or deposit, nor does it reflect the deduction of product fees or taxes which would reduce the figures shown here.

 Chart showing Hypothetical Future Values of a Savings Account earning 5% Compounded Monthly with a $1,000 Deposit and Monthly Contributions


 As you can see, regular monthly contributions accelerate the growth in savings. For example, look at a savings horizon of 10 years. Your initial deposit grows to $1,646. If you make monthly contributions of $100, the account grows to $17,135 a difference of $15,529. The total value of contributions is $100 for 120 months, or $12,000. These contributions add $3,529 ($15,529-$12,000) in interest to the account over the 10-year period.

Let’s look at the same account after 30 years. Your initial deposit grows to $4,467. If you make monthly contributions of $100, the account grows to $87,693, a difference of $83,226. The total value of contributions is $100 times 360 months, or $36,000. The extra contributions add $47,226 ($83,226-$36,000) in interest to the account. If you divide $47,226 by three, you get $15,742. Interpretation: for a 30-year period, contributions of $100 a month add $15,742 in interest to the account, on average, for each of the three 10-year periods. This is more than four and half times the amount of interest earned in the first example.

Clearly, compounding has tremendous benefits over time. The following is a list of the major variables that affect growth of a savings account:

  • Amount of contributions. Your initial deposit is what gets your savings plan started. It can be as little as $10 or $25. Growth in an account benefits less from the initial deposit than from regular contributions.
  • Frequency of contributions. The more frequently you contribute, the faster your savings grow with compounding. However, it’s important that you don’t over-contribute to the extent that you have to borrow money at an interest rate that is higher than what you earn.
  • Deposit horizon. Your deposit horizon is the number of years you are able to save. The greater the number of years, the more your account will grow.
  • Rate of return. The rate at which your account grows depends on the interest rate, or rate of return.

Saving for the future involves a few simple steps. You need to set up a personal budget and savings plan. You need to have the discipline to make regular contributions. The benefits of compounding, saving for the long term, and having realistic expectations of returns help you to plan your financial goals.