The power of compounding

Chris Broome – Chartered Financial Planner

The power of compounding is the ability of an investment to generate earnings not only on the original investment but also on the accumulated interest or earnings.

This means that the longer the investment is held, the more significant the impact of compounding becomes.

The power of compounding

For example, let’s say you invest £10,000 in an account that earns an annual return of 5%.

After one year, your investment would be worth £10,500.

But if you leave the money invested for another year, the return is earned not only on the original £10,000 but also on the £500 earned in the first year.

So, after the second year, your investment would be worth £11,025.

Over time, the effect of compounding becomes even more pronounced.

After 10 years, the same £10,000 investment would be worth £16,386.

By holding the investment for 20 years, the value would grow to £27,126.

This compounding effect is especially powerful when investing for long-term goals, such as retirement.

By starting to invest early and consistently over time, even small contributions can compound into significant wealth over the long term.

Next steps

If you have any questions about any of the above, or wish to discuss your long-term financial plans with us, please get in touch. Contact us

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.