Compound interest — the most powerful force in the universe?

One of the most brilliant minds of the early twentieth century is said to have put it like this:

Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.

Whether Einstein actually said it is debated. The underlying point is not. Saving for longer means you reap the rewards that compounding brings and the effect is far larger than most people intuitively expect.

How compound interest works

The principle is simple. In year one you earn a return on what you put in. In year two you earn a return on what you put in plus last year’s return. In year three, on all of it again. Each year the base gets bigger, so each year’s growth is bigger than the last.

Over three years at, say, 6% a year with no charges, the difference is noticeable but modest. Stretch the same arithmetic over the thirty or forty years that a pension typically runs and it stops being modest very quickly indeed. The later years do most of the work.

Which is why starting matters more than optimising

People agonise over which fund to choose and postpone starting while they decide. In practice, the years you were not invested cost far more than a slightly imperfect fund choice ever will.

The same logic explains why a pension left untouched from an old job is worth finding and why small increases to a monthly contribution in your thirties do more than large ones in your fifties.

Where we come in

We can help you start or continue saving, whether you are employed, self-employed or already retired. That might mean tracking down a pension from a previous employer that has been sitting there ignored, or simply setting up a new ISA or pension and getting the fund choice sensible.

We have been helping people across Preston and Lancashire do exactly this since 1985.