If you’ve been following us along our journey from the beginning, you’ll have heard us talk about Compound Interest. Put simply, it is interest made on interest. Not the most exciting topic to most, but if you understand it, you’ll learn to love it. One big fan was Mr Albert Einstein. He is often quoted as saying it was the Eighth Wonder of the World. He said
“Compound Interest is the Eighth Wonder of the World. He who understands it, earns it … he who doesn’t … pays it.” Other quotes of his called it “the greatest mathematical discovery of all time.”
What is Compound Interest?
In its simplest form, it is earning interest on interest you have previously earned. Or when we invest, it is when we reinvest income or dividends, making a further return on what you have already earned. And that’s why those who understand it, earn it.
If you don’t make use of compound interest, you pay it, because for each day, or week, or month that you don’t start earning interest, you also miss out on interest on the interest.
It can get quite confusing. The easiest way to show it is the below table. This shows the different levels of return on investing just £100 per month starting aged 20 would result in by age 60.
The difference can be huge! Especially if your money is invested in a portfolio of assets which achieves an above inflation return. Of course, there is risk with investing. Any investment should be carefully considered and matched to your personal appetite for risk. There may be times in the short term when your investments will have lost money, but by leaving it for a long time, the returns should take care of themselves.
Have a go with us – you can go as far as you want, and it will be completely anonymous unless you enter your email address. Even if you do, we won’t chase you – it just means you can log back in and not have to start over.
Remember, compound interest can work against you too. If you have loans or credit card debt where you keep just paying the minimum, the interest you pay will compound. Paying off any expensive debts should be your first priority.
The $1million Bet
I’ve talked about Mr Warren Buffett before, and his $1 million bet. He said that the S&P 500 ( a US index fund) over 10 years would beat a hedge fund run by Ted Seides, of Protégé Partners. The bet ends on 31st December, but it looks like Buffett is going to win by a landslide, unless there is a massive market loss between now and then. Fingers crossed the “Dotard” and the “Rocket Man” don’t get involved…. Seides has conceded a loss, but we are all still waiting to see how it would have finished up.
Buffett has always said picking index or tracker funds, with low fees, and allowing for market growth and reinvestment of dividends (making use of compound interest) will always win out, and so far, it looks almost nailed on win. Remember what has happened since 2007 with the market crash in 2008, and still it looks like a landslide victory.
How can you get involved?
The only way for you to get involved is to bite the bullet and get your money invested. You need to be sure you can afford to invest it for a long time, and fully understand the risks with investments. If you have any questions please do ask. You can use us, or you can use someone else – just make sure you get in on it. The longer you leave it, the more you give up.