The Power of Compounding

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

- Albert Einstein

This is one of my favourite things as it doesn’t just apply to investing.

Compound interest refers to the principle that when you save money, as well as earning interest on the savings, you also earn interest on the interest itself.

Therefore, every year that the money is in your account you are earning interest on each previous year’s interest. This means that not only are your savings growing over time, but that the rate at which they grow gets faster as well.

The longer you allow compounding to occur the more powerful it is.

Here is a worked example:

If you invested £50 a month for your new born child at a rate of 10% until they were 60 years of age it would be worth a whopping £1.9 million

If you are thinking I can wait until I am older to save look at the effect of leaving this same investment until you are 20 to start. Same contribution by 20 years less compounding = £280,000

One of the big thing to look at here is actually how much was invested over those periods. In scenario 1 it was £36,000. In scenario 2 it was £24,000.

There dear readers is the power of compounding a work.

None of this constitutes financial advice.