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Saving for a house? Don’t forget to save for this too

Here in the UK, we tend to be quite obsessed with property – everyone wants to get onto the property ladder. As such, there are millions of people across the country whose main financial goal is saving for a house.

Of course, saving money for a house is a noble goal, as there are many benefits of owning your own home. For example, you’ll no longer need to pay rent to a landlord or abide by their rules. You’ll also be able to build up equity in your home and potentially benefit from future house price growth. Additionally, owning your own home provides a degree of stability and security.

Saving for your future 

However, when it comes to saving, a house isn’t the only important thing to save for. Even if you are still in your 20s or 30s, retirement saving should also be a priority, simply because the earlier you start saving for retirement, the easier it becomes to build up a substantial retirement pot.

Leave it until later in life, and it becomes far more challenging to accumulate a large sum of money for retirement, which means there’s less chance that you’ll be able to live a luxurious lifestyle in your later years. Let me illustrate with an example.

Retirement saving: starting at 25 vs 40

Let’s say that at age 25, you begin putting away £2,000 per year for retirement into a diversified portfolio of stocks and funds that earns 9% per year. By the time you hit 60, this portfolio will have grown to around £470,000. That’s a handy sum of money to have saved by that age. It’s also quite an impressive sum, given that you were putting away less than £40 per week.

By contrast, if you left your retirement saving until age 40 and then begun putting the same £2,000 per year away into the same diversified portfolio of stocks and funds earning 9% per year, your portfolio would only grow to around £114,000 by age 60. That’s a big difference, isn’t it?

Realistically, £114,000 isn’t likely to go very far when you consider that you could live for another 30+ years once you hit 60. So, you’d probably need to keep working for at least another few years to keep building up your retirement pot.

The secret to building wealth

Why is there such a big difference in the two amounts? Well, it comes down to the power of compounding – or earning a return on your past earnings. Compounding really is the secret to building wealth. The longer you can compound your money for, the more wealth you can build. 

The key takeaway here is that the earlier you can start building up some retirement savings the better. Even if you have other financial goals, such as saving for a house, don’t neglect your retirement savings entirely. Even just a small amount of savings here and there could make a big difference to your wealth over the long term.

If you’re looking for more retirement saving tips, you’ve come to the right place.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.