You may not think that investing a mere £100 could make you rich, but that £100 is a start and if you don’t make that start, you may be ignoring the benefits that compounding and levers can bring to your life.
As Archimedes is claimed to have said: “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”
Why compound interest matters
Compound interest is important because the more capital we have, the more capital that capital makes. There’s a reason Einstein said that compound interest is the ‘eighth wonder of the world’. With the interest generated on our capital, this capital is then reinvested into the principal to compound and generate an even larger amount.
To put it simply, if you invest just £100 a month from the age of 21 until you’re 30 — and you can generate an 8% return a year (not unreasonable by investing in low-cost passive market trackers) — you would end up with £15,826.69.
Of that amount, £10,900 would be cash that you’d deposited, and a whopping £4,926.69 would have been earned from interest alone!
Now, here’s where it gets exciting. Let’s say you didn’t add another penny from the age of 30. And you just let that £15,826.69 grow.
By the age of 40, you’d be looking at £34,168.64. The cash has more than doubled and you haven’t added any money. By the age of 50, it’s doubled again and is accelerating as you’d be at £68,303.26. And by the age of 60? You’d be looking at £159,258.55.
Granted, that’s not exactly making anyone rich. But it’s not change that falls out of your pocket either. And it’s also not a bad return for saving just £100 a month for nine years. That’s cutting back on a few Starbucks and missing the odd night out in a month.
But let’s say you’re at a point in your life where you can’t spare much for investing so you decide it’s not worth it. Is that really the right idea? Of course not. In fact, starting as early as possible can make a huge difference to the amount you accumulate.
Start soon to reap the rewards
If you’re still not convinced by compounding, imagine someone deciding to start at 30 who then saves £100 a month for the next 30 years until they’re 60.
In 30 years, that pot (at the same rate of 8%) would be worth £142,767.59. That’s a nice amount but it’s less than the person who saved for only nine years instead of 30 and then did nothing afterwards!
But someone who saved £100 a month from the age of 21 until 60 would be looking at a total pot of £301,019.86. ‘Paying yourself’ is one of the best investments you can make. Especially if you take advantage of that compounding effect and add more cash to your investments as you earn more (instead of excessive lifestyle creep).
So you see, it’s not a case of being able to afford starting investing. It’s a case of whether you can afford not to start investing?
Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019