How long before your investment pays you back?

So you’ve decided you want to take control of your wealth and secure your financial future by making a long-term investment.

That’s great, but how long will it take before you start to see a significant reward for sacrificing consumption today for a possible, but uncertain, future benefit?

How long will it take for you to start being repaid the same amount of money you invested?

There are two factors that are critical to your rewards.

  1. Time
  2. The rate of compound return.

The rate of compound interest is significant because the higher your return, the quicker your money will multiply.

Time is significant because the longer you invest, the more opportunity is provided for compound interest to work it’s magic.

For example, if you obtained an investment return of 7%, it will take 10 years for your money to double.

Invest £10,000 and in 10 years you’ll have £20,000.

Invest £100,000 and in 10 years you’ll have £200,000.

But what about a lower return?

Well, say you only earn 3% a year.

It will take you nearly 24 years to double your money.

What about a higher return?

Well, a return of 15% will take you just under 5 years to double in value.

Thinking about it another way, if you invest £10,000 and achieve a 15% return, in 21 years you will have the same amount of money as someone investing £100,000 but only achieving a 3% return.

So maybe the hare actually does beat the tortoise?

Not necessarily.

Whilst it’s clear you can actually pay a very high price for being risk averse and overly cautious, if you chase too high returns, you run the risk of losing money and handicapping any prospect of obtaining attractive returns.

Here’s why.

Investment returns are uncertain. If it were certain that you’d get a 15% return, everyone would go for that option rather than say 3%. When investing capital, in any form, you run the risk of loss and if you invest without understanding, you can even lose your shirt.

Say you lose 40% of your investment. It will take years to just get back to your original investment sum.

Here’s how many years it will take:

3% return: 18 years

7% return: 8 years

15% return: 4 years.

Whilst the math is the same for a £10,000 investment and a £100,000 investment, the psychology of loss is entirely different.

Just think how sick you would feel losing £4,000, compared to losing £40,000.

Also worryingly, many everyday investors experience the journey of losing something like 40%, as they get sucked into the markets at high valuations and then compound this first mistake by following it up with extreme caution and then obtaining low returns from bank deposits etc. So they invest at the worst time filled with optimism, and then have to wait years just to get their original investment amount back!

Please learn how to manage your own money. I would truly hate for you to become one of them.

Let’s return to my original question. How long before your savings start paying you back what you put in?

Again, this firstly depends on the return achieved when you are trying to grow your pot.

Secondly, it depends on the rate of income you wish to take from your investments. Too little and you could miss out on income you could have enjoyed. Too much and you may end up eating your capital.

I call this rate the ‘prudent withdrawal rate’.

Many other financial advisers and planners call this the ‘safe withdrawal rate’, however I feel that is misleading as ‘safe’ doesn’t exist.

You have to manage and navigate risks to ensure you come through safely, but there is no true ‘safe’ amount that can be ascertained today. The best we can do is attempt to navigate a course based upon some sensible assumptions and an understanding of the uncertain nature of the world and especially financial markets.

The only way to ascertain your ‘prudent withdrawal rate’ is by going through a bespoke and comprehensive financial planning process.

For the purpose of teaching you the value of long-term investment, let’s assume you take an income of 3% of your funds.

That means you will need a fund of £333,333 to provide an income of £10,000 a year.

Or you will need a fund of £3.3million, to provide an income of £100,000 a year.

Remember, this is passive income.

Your money is working for you. You’re not working for your money.

Want to know how long it will take you to get here?

Achieving a long-term investment return of 3%              119 years

Achieving a long-term investment return of 7%              52 years

Achieving a long-term investment return of 15%            25 years

What lessons can we take from this?

  1. The importance of starting to manage your money today. In fact, yesterday would have been better – time to catch up.
  1. Obtaining the return available from banks and ‘safe’ deposits is never going to help you achieve anything resembling financial freedom and prosperity. You’ll have to live extremely frugally and stuff away as much as possible throughout your whole life just to ensure you can make ends meat in retirement.
  1. Avoiding financial loss is critical, which is why you need a thorough understanding of the risks applicable when investing.
  1. Can you really afford to entirely leave this in the hands of someone else? Sure you may need some help, either with your overall plan, or specific parts of your finances, but you should be the person in control of your wealth and you need to have the understanding to be able to do it.

I hope you found this article helpful. Please let me know if you have any questions. I’d be delighted to hear from you and always happy to help.

Get in touch today for a personal, independent, and comprehensive financial plan.

Mark Underdown | DipPFS IMC CeMap

Financial Planning Consultant


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