The power of compound interest revealed
Fidelity compared two hypothetical investors’ investment habits and their account balances after several decades. The analysis showed that investing earlier could mean investors contribute less to their portfolio – yet still end up better off in the long-term.
The investment company compared “investor A” who began investing at 18, and “investor B” who began their investment journey at the age of 38. In both cases it assumed annual growth of 5 per cent, service fees of 0.35 per cent, and ongoing charges of 0.75 per cent.
Investor A invested £1,000 a year into the stock market between the ages of 18 and 38. This resulted in a pot worth £30,620. Even if they contributed nothing further, the power of compound interest would see their original investment grow to £86,026 by the time they reached the age of 65.
Investor B saved £1,000 a year between the ages of 38 and 65 – contributing an additional £8,000 to their pot during this time, compared to investor A. However, by the age of 65 their overall return stands at £49,205 – more than £30,000 less.
Tom Stevenson, investment director for personal investing at Fidelity International, said: “Compound interest is an extraordinarily powerful force that anyone saving or investing for their future should understand. Compounding is the repeated addition of interest, describing what happens when you earn interest on both the money you have initially put aside plus the interest you have already earned on that starting amount.
“The power of compounding can turn small but consistent financial commitments into a considerable amount of money after a few decades. As our calculations show, the important factor here is time. It is the key component of compounding and the reason why people should start to save as soon as they can.
“Even choosing to contribute to your pot for a longer period of time won’t necessarily allow you to compensate for those lost early years. While saving £1,000 from the age of 18 might seem like something of a challenge, even setting aside £50 a month – amounting to £600 a year – could set you on the road to achieving your financial goals later in life.”