Compounding - or why I am not planning to buy the recommended added years to my NHS pension...

I just love compounding! It is an essential aid to helping us doctors reach financial freedom!

Einstein is quoted as saying that compounding is the 9th wonder of the world!

Unfortunately it works both ways - if you are in debt & paying interest, you pay more interest for every month that you are in debt.

But when you are in credit, and using, say, property or the stock market to invest (rather than a bank savings account or even ISA, where your interest rate does not keep up with inflation once you have paid your tax) - wow, the sky's your limit!

For example, knowing that, if I wished to take advantage of Added Years I needed to do so by the end of March 2008 (in view of changes to the NHS pension scheme), I got myself a quote.

I am expected to earn about £73.69 per week via my state pension. Not altogether sure if this includes the NHS superannuation scheme, which is the best available (not for long..). I have long wondered whether to buy the added years. Last time I had a quote I was going to need to pay in over £500 per month. That must have been while I was still full-time....

They are now suggesting that I pay in £310.55 per month. Of course, this is a great deal, with the Government (as employer) contributing, & reduced tax payable on the income...

But - if I invested with the stock market knowledge that I have obtained, with an appreciation value of 30% per annum (that is the low time-input method) - the gains are so much greater. After 15 years I would have £532,326

If on the other hand I used the more time-intensive method that I have been practising, giving a return of 3% per month or 36% per annum (and other students are achieving 4 or even 6% per month), then compounding would lead to my investment (£10 to start, then £310.55 per month) growing to £2,104,913 over 15 years. This estimate excludes tax & brokers fees, but I doubt that the NHS pension investments could better it...

See how much difference a few percent makes over time? THAT is the power of compounding...

Think it over!

Here's to financial free*dom!

Alison

Financial Freedom for Doctors can help you to work out how soon you can be financially free, enabling you to work part time, take better holidays or plan for an earlier retirement. Find financial freedom through property investment, the stock market and the internet.