Building Your Savings
Einstein once made the point that compound interest is the 8th wonder of the world. He had a point. Compound interest (which is the combined effect of adding interest on top of the initial capital and then earning more interest on that interest and repeating over as a long a period as possible) can be one of the most powerful tools in helping you build up your savings. Let’s put that into perspective:
Let’s say you invest £100,000 which earns a 5% annual return. In year one, you would earn £5,000, giving you a new balance of £105,000. In year two you would earn 5% on the increased value of £105,000, which equates to £5,250, giving you a new balance of £110,250. Now let’s see the power of compound interest over 20 years.
- Initial investment = £100,000
- Average rate of return per annum = 5%
- Estimated value after 20 years = £265,329.
This effect is further amplified when you add regular contributions to your investment.