Fund Your Freelancer Future: The Magic Of Investing & Compound Interest

Amongst the many perks of freelancing comes with financial burdens: inconsistent wages and little financial support for those down months. This makes saving for your future particularly difficult.

After being left out of the government’s workplace pension scheme, freelancers are left in the dark when it comes to finances. Everyone should have the rights to a comfortable retirement, especially after working for so many years!

With a big fat helping hand from ‘compound interest’, saving a little now can set you up for a hefty pension, without having to put away anywhere as much as you’d thought when it comes to settling down.

1. ‘Compound interest’: The magic ingredient that makes your money grow so that you don’t have to save as much as you once thought…

“Start as soon as possible”.

I may sound like your mother, but it’s probably one of the best pieces of advice I can give you. It’s the hardest, but equally the most important thing to do because of the power of compounding. 

Compounding means that you earn a return on your initial investment, as well as a return from previous years of investing, so the longer your money is invested the faster it could grow, and it keeps repeating this process to compound even further.

Let’s put this into perspective and assume an average 5% growth rate each year.

• Example 1: You’re 20 years old. You pay £5000 into your pension. With 48 years of investing, when you’re 68, this could be worth around £54,841.75.
• Example 2: You’re 35 years old. You pay £5000 into your pension. With 33 years of investing, when you’re 68, this could be worth around £25,945.80. HALF of what it could have been worth if you’d contributed just 15 years earlier.

These figures are purely calculations based on 5% growth rate without inflation adjustments, and are not guaranteed, but they show how much of a dramatic difference saving earlier can make when it comes to pensions and investing in general.

Trying to make up that extra £25,000 in the example above means you’d have to contribute a heck of a lot more than you would have had to if you’d started sooner.

“Make £25,000 extra from saving just 15 years earlier.”

This shouldn’t be scary, but rather comforting that you can save a lot less money into your pension in the long run, if you save earlier.

 Investing vs. a fixed account: Why risk = rewards!

Many freelancers are put off by the word ‘investing’ when it comes to pensions. People worry that all of their money could be lost, and maintain the biggest misconception that investing is only for big investment bankers or stockbrokers. 

Investing is actually very simple, accessible and is for everyone who wants their money to grow! 

Pensions are invested because historically speaking, money grows significantly faster if it is invested across the stock market for a long period of time. Over the last 100 years the stock market has gone up on average by 10% per year! Although there are ups and downs from year-to-year, money managers reduce the effects of the downs, while still capturing as much as possible of the ups, through diversification (buying different investments across the market, for example some in property, stocks and shares to reduce the risk of capital loss). 

A fixed-income account such as a savings account does give you certainty and removes any risky business, as you’re guaranteed an amount by the end of the investment period. However, the low return on many fixed-income products can mean your investment might not even be able to keep pace with the rate of inflation… in this case, you may actually be losing out on money. 

Investing gives you the potential to grow faster than it could in a savings account – especially if you couple it with compound interest, where you’ll also make a return on the previous years of investment returns, meaning your pot can exponentially grow! 

Because pensions are a very, very long term investment, any losses along the way can be made up over the years, and because of the greater returns you could earn on the whole by investing in the stock market, you shouldn’t be nervous about investing! 

Convinced that starting early can set you up for a better future? Start your pension with Penfold, the online pension for creative freelancers, and our team of experts will help you with all queries on investing, tax or anything self-employed related!

Click here to get started.