Compound interest: is it worth my time?
For sure. Everyone knows that interest on debt is bad and interest on savings is good but compound interest could take your money to a whole different level. So buckle in and we’ll break down what it is and how it can take you and your money places.
What is compound interest?
Google it and the top result will tell you some stuff about the initial principle, accumulated interest, so on and so forth. To explain it with a bit less jargon, compound interest is your interest on savings earning more interest. So the longer you save, the more your money builds up or...compounds.
An example to make things clearer
Based on a simple amount to make the maths easier. If you saved £1,000 in an account with a 10% interest rate, by the end of the year you’d have £1,100, including £100 of interest. If you saved the whole amount for another year your interest would be £110 by the end of it. The following year? £121 and so on. Think of it like a money snowball rolling downhill. If you leave it as is, it’ll continue to grow with the momentum of time.
The snowball effect increases if the interest is pair more frequently. So if your savings get paid interest twice or four times a year, the total amount of interest across the whole year will be higher. Why? Because interest is being paid on the interest that builds in those smaller periods.
Why is it worth your time?
Time is actually a key part of why compound interest is so powerful when it comes to your money. The rolling effect of the interest means that the earlier you start saving the bigger the money snowball gets.
To put it into real money context: if you started saving £100 a month at 30 years old and carried on until you were 60, with a 10% interest rate, you’d end up with a sum of £217,132.11. But if you started saving that same £100 a month at 20 years old instead, stopped when you were 30 and left the money in the account until you turned 60, you’d have…. £367,090.06. All due to the rolling effect of compound interest. Time, patience and a whole lot of compound interest can make saving for 10 years more profitable than saving for 30.
Get it? Then what are ya waiting for? Get saving already.