Getting more pound by compounding
What is the most powerful force in the universe? According to Albert Einstein it is compound interest. If you have been planning your financial future you’ll know all about compound interest and how it works. However the person without money thinks this kind of stuff is for the rich. This is not true, you can start to save or invest with as little as you can spare.
What is compound interest? Simply put it is Interest earned not only on your original investment, but on your accrued earnings as well.
Could you spare £7 per week? This is the cost of 3 DVDs rented at Blockbuster. It is the cost of two Macdonald meals for 2. It is the cost of a Chinese takeaway for 2, or even 1. We can all cut down and we always seem to work it out no matter how much we are bringing in. The following two examples will show the power of compound interest.
“¢ Example 1: if you save £7 per week every week for 40 years (until you retire), in a savings account, you would have accrued just over £46,000. A nice little nest egg for when you retire. This is assuming you are getting 5% per year and you are re-investing your profits each year.
“¢ Example 2: If you invest the same £7 per week into a tracker fund (a fund which tracks the top companies in the stock market) and leave it for 40 years, which allows for the fluctuations, you would have accrued £235,000, nearly a quarter of a million pounds. This is assuming you are getting 11% per year and you are re-investing your profits each year.
It doesn’t matter how much you are investing as long as you are investing and doing it regularly. No matter how much we earn we always seem to spend the money. The trick to saving or investing regularly is to not see it before you can touch it. We do this every month with direct debits; we don’t see the money as it has been taken out of the bank account before we can spend it. If you set up a direct debit for £7 per week, you tend not to notice it and you are still able to live within your budget.
This is one of the reasons the rich are rich. They have a variety of strategies for investing and one of them is regular investing to compound. This is their safety net for the future.
The average person can let it be their safety net for the future and we won’t have to rely on the government for our pension. We have to take control of our future now, especially in todays climate. The way to do this is to invest for the future and invest regularly.