Compound Interest

Why compound interest should be considered as the 8th wonder of the world.

According to Albert Einstein the most powerful force in the universe was the principle of compounding. This principle is not widely understood by many; it is essentially earning interest on interest.

An example of this would be if you have £1,000 which achieves growth of 10% you have £1,100. If this then grows another 10% you end up with £1,210 and so on. Very powerful!

Factors which influence the rate at which your money compounds are things such as the growth rate received and the time your money remains invested. To show you just how powerful compound interest actually is, the table below shows how much your capital could be worth if you had invested £10,000 at growth rates of 4%, 8% and 10% respectively over  a 5, 10 and 20 year period.

5 years 10 years 20 years
Original investment £10,000 £10,000 £10,000
4% return £12,166.53 £14,802.44 £21,068.49
8% return £14,693.28 £21,589.25 £46,609.57
10% return £16,105.10 £23,957.42 £67,275

Taking the example above, over a 5 year period with a growth rate of 4% per annum the original £10,000 would have grown to £12,166.53(growth of 21.67%) because of compound interest. Of course most investments do not provide consistent 4, 8 or 10%; the numbers used in the example are just to show you how effective compound interest can be over a long period of time.

Compound interest favours those that start early, which is why paying into a pension, or saving for the future, as soon as possible is extremely powerful. It is however never too late to start (or too early). If you would like to discuss this further or would like to talk about how we could make your money work harder, please do not hesitate to get in contact today.

 Published by: Benjamin Wooltorton