Turn a Tenner Into Ten Thousand With Compound Interest
What if your money could grow on its own without constant effort? Well, you can with compound interest!
When you save money and let it earn interest, that interest also starts to earn interest over time. With small, regular contributions, your savings can build up steadily, and the longer you leave it, the more it will grow.
Here’s a closer look at how compound interest works and why starting sooner, even with small amounts, can make a huge difference.
How compound interest works
Interest is a reward for saving. When you put money into a savings or investment account, the bank or account provider pays you a small percentage each year for letting them use your money.
Compound interest adds interest to your original amount and any interest you’ve already earned. Over time, this “interest on interest” effect builds up and accelerates.
A simple example often used is the “doubling penny.”
If a penny doubles daily for a month, it would be worth over £5 million by day 30. Incredibly, 97% of the £5 million value is made in the last 5 days of the month.
This is an extreme example because a 100% daily return (i.e. it doubles) is unheard of. Still, it shows the powerful effect of compounding and how a small amount can grow exponentially over time.
With compound interest, your savings start to grow faster the longer they are left to build, highlighting how even small investments can turn into significant sums when given time.
Why starting early matters more than saving more later
It’s easy to think you can wait to save and catch up later by putting away more money.
But with compound interest, starting early, even with smaller amounts, often yields better results than saving more significant amounts for a shorter period. This is the incredible natural effect of compounding over time.
Let’s compare two savers, each earning 5% interest.
Reuven starts at age 25, putting aside £100 monthly for 20 years to prepare for his eldest’s wedding.
Shimon, on the other hand, begins at age 35 and saves £100 monthly for 10 years to cover his son’s yeshiva tuition.
By the end of their saving periods, although Reuven and Shimon contributed the same amount monthly, Reuven’s longer investment period allowed his balance to reach £41,103 – nearly three times Shimon’s balance of £15,528!
This example shows that with compound interest, the duration of time in the market can have a much greater impact than simply the total amount saved. The longer you invest, the more your savings benefit from exponential growth.
Automate your savings
The easiest way to stick to a savings plan is to set it up automatically. This way, you don’t have to remember to save every month, and you’re sure to add to your account regularly.
Many banks and investment accounts let you set up automatic transfers. Once set up, the money goes directly into your savings or investment account every month.
Patience is key – Avoid taking money out
One of the remarkable features of compound interest is that most growth happens later in the saving period.
In the early years, gains are modest because they’re based on a smaller balance. But as your balance grows, so does the interest earned on it.
The growth in the last five years of Reuven’s 20-year saving period brought nearly as much growth as the first 15 years combined. Compound interest builds slowly at first but picks up speed and value.
Once your savings plan is set up, the best thing you can do is leave it alone. With compound interest, the longer your money stays untouched, the more it grows. Taking money out early disrupts this growth while leaving it invested, allowing each interest to build on the last.
The simple path to wealth
Einstein reportedly called compound interest the “eighth wonder of the world” because it can turn small savings into considerable wealth over time. By starting early, setting up automatic contributions, and letting your money grow without interference, you’re letting compound interest work for you.
This is one of the simplest ways to build wealth for the future. It’s a bit like cooking a good cholent. You can add more later, but there’s no shortcut for letting it simmer.
