Make Your Money Do the Hard Work
Wouldn’t it be lovely to have your money do all the hard work so that you didn’t have to? When people talk about being financially free, that is exactly what they mean.
So how can my money work for me?
It’s a very simple concept, and one of my favourite financial topics. Compound interest and it’s a concept which the savvy investor understands. It’s simple and it’s POWERFUL.
Albert Einstein is quoted as saying: “the power of compound interest [is] the most powerful force in the universe.”
What is Compound Interest?
Compound interest is interest added to the principal of a deposit, so that the added interest also earns interest from then on.
How does Compound Interest Work?
Yes, that is a mouthful, so here is an example.
Example 1:
Let’s say that you deposit £1,000 into an account this year and the account earns 10% interest per year.
- At the end of the first year, the account balance would be £1,100 (£1,000 x 10%).
- At the end of year 2, the balance would be £1,210 (£1,100 x 10%).
- At the end of year 3, the account balance would be £1,331 (£1,210 x 10%). And so on….
As you can see, the account balance is growing because there is interest paid on the interest earned the previous year. What a great opportunity for an investment to grow faster and faster! It will grow exponentially if you leave it undisturbed.
At the end of the third year, you would have earned £210 by doing nothing, because your money is working for you in the form of compounding interest.
Over a longer time horizon, the difference between leaving the interest to grow vs. withdrawing it can be substantial.
Example 2:
Continuing with Example 1, after 20 years, the balance of the account would be £6,727.50, and after 30 years, the balance would be £17,449. In 30 years, your money would earn £16,449 for you!
Magic! The interest on the interest just continues to accumulate.
I am going to take this illustration one step further.
Now, let’s supposed that you (the investor) continue to deposit an additional £1,000 EACH year in the account, and do not withdraw any interest. For ease of calculations, we’ll again assume a 10% interest rate in the next example.
Example 3:
At the end of the second year, the account will have a balance of £2,210 (£1,100 plus the additional £1,000).
At the end of year 3, the account would be worth £3,431.
After 20 years, if you continue to deposit an additional £1,000 each year, your money would have grown to £69,730, and after 30 years it would be worth £198,392.83. How? Because the interest on your account continues to earn interest too. Wow!
So now you know what compound interest is and its benefits. Whether it is in a savings account or an investment account, in the long run leaving your investment to grow without withdrawing the interest can have a sizeable impact on your account balance.
So it’s time to start saving in order to make the wonder of compound interest work for you.
Saving regularly can have an even bigger impact, and can help you achieve your financial goals much faster. You can read our handy guide on how to save money effortlessly.
Saving regularly can have a big impact - it can help you achieve your financial goals much faster.Click To TweetDon’t Be Tempted to Spend It
You may be tempted to take the interest as an extra income, or think the interest will not amount to much. In the long run, it is well worth it to leave your money to grow and grow so you can take full advantage of the miracle of compound interest.
The long-term approach of reinvesting your earnings will pay off in years to come, so trade in the current reward of a bit of extra income for the long-term benefit. You can rest easy knowing that your money is working FOR you!
You can start a regular savings plan from as little as £50, or with a £1,000 lump sum with Fidelity. Click here to find out more.
Over to You
How much money can you afford to put away each month? And how much will your investments be worth if you save and earn compound interest after a year or five years?
And if you are READY to start investing, stocks and shares ISA is the simplest route to get started.
I highly recommend Fidelity Stocks and Shares ISA. Fidelity ISA is an easy-to-manage, tax-efficient Stocks and Shares ISA.
They offer the flexibility of investing lump sums or starting a regular savings plan to help you reach your goals. You can start a regular savings plan from as little as £25 or make a lump sum contribution from £1,000.
It’s a great way to invest your ISA allowance this tax year, and you can start investing in a wide range of investment options in just a few easy steps.
And the best part is, it is easy to get started – and no fancy investment knowledge is required!
Click here to start investing with Fidelity Stocks and Shares ISA!
- Make Your Money Do the Hard Work - March 1, 2016
Very interesting and informative post, thank you.
Thanks, Chantelle! Getting your money working for you is a key to financial success. Julie 🙂
Regular saving is essential and its lovely to see a little nest egg build. But also a good idea if the unexpected should ever happen
Candace, thank you for your comment. Yes, peace of mind comes from knowing you have money to fall back on when life throws you a hiccup and the cushion of that nestegg allows for so many opportunities to take shape. Julie 🙂
A very informative post. I just wish I had the money to save in the first place!
Rachel thank you for taking the time to leave your comments. It can be very difficult to set money aside to save when you are living from paycheck to paycheck. The most important thing is to start however small and make it automatic.
You’ve lost me at “compound interest” 😉 But definitely sounds interesting, though I’ll probably have to have another read before the information sinks 😉
This is the approach I’m taking to saving for my son – paying in what small amounts we can and just watching the pot build up. He’s only just about to turn 2, so we have a lot of years before he’s likely to want to cash it in!
Money! Problems when you have it, problems when you don’t 🙂 Good informative post.
This is a brilliant post! I love being savvy with money! I just find it hard to keep money in savings without touching it at all! Are usually save up on purpose for specific things like holidays so then I need to withdraw that money Xxx
Great post. I was just trying to explain compound interest to my 14-year-old son the other day. I don’t think I did a great job of it, so I’ll just show him your post. Thanks
Wendy thank you for taking the time to leave your comments. I am glad you found the post useful and I hope your son find the post beneficial too.
It all sounds so complicated but that is probably because I am terrible at maths lol. What a great resource though I am going to pin it to help me out in the future.
This is really useful and clear. I have really been feeling lately that I need to start making small savings, we never seem to have any money to spare and I know if I tried to save on the small things it would make a big difference.
Great post, I am a Chartered Financial Planner and believe it is so important that messages like these are spread as generally there is a lack of information avaliable, and that which is given freely, normally has a product attached to it. Thank you for sharing.
I am actually addicted to the principle of saving, and of getting my money to work hard for me. I think that once you learn this stuff, you cant ‘un-learn’ it – there is no going back!
Great post.
Anna x