Whilst Einstein was certainly right about a vast number of things, one of the statements he was arguably most right about was that compound interest is the 8th wonder of the world.
Just to build on one of the previous posts regarding pensions for children. See below assuming you put £1,000 into a junior ISA and added £1,000 per year, then grew it at 7% per annum –
- Initial balance – £1,000.00
- Additional deposits – £18,000.00 (£1,000 annually)
- Annual assumed rate of return – 7%
- Value after 18 years – £40,781.43
- Interest Earned – £21,781.43
- Time-weighted return – 251.25%
I do tend to talk a lot about compound interest, primarily because the results speak for themselves. With a relatively small amount of money per year and a not unachievable annual growth rate (the S&P 500 has averaged around 10% per year over 50 years) you have effectively accrued the deposit on a flat by the time your child is 18.
To take this even further, lets say you took that £40,781.43 and placed it into a pension once your child turned 18. If you made no further additions and continued to grow the pot at 7% per annum until your child turned 65 the results are as follows –
- Initial Balance – £40,781.43
- Annual assumed rate of return – 7%
- Value after 47 years – £1,084,276.42
- Interest Earned – £1,043,494.99
- Time-weighted return – 2558.75%
The results are quite astounding with a total investment of £19,000 over the first 18 years of their life you could provide them with a pension pot worth £1,084,276.42. Whilst £1m in the future wont be worth £1m in today’s money it certainly does show the power of compound interest.
*Disclaimer* – I have attempted to make the above figures as accurate as possible but with any investment, no rate of return can be guaranteed and any projections are for guidance and illustrative purposes only.