Archive | September, 2013

Compounding Your Investment

30 Sep

This month I was back in the classroom teaching a weekly financial class of teenagers about compounding interest.  We were investigating how the compounding effect works with the 4 different investment types.

What is Compounding Interest?

Compounding is simply earning interest on interest and letting ‘time’ work its magic.  So instead of withdrawing your interest each year reinvest it back into the investment and earn interest on interest.  After several years the increase in savings is exponential.

How Saving £2.73 A Day Can Make You A Millionaire

In my books I give examples of the effects of compounding interest and how you can become a millionaire saving just £2.73 per day or £1000 a year. Each year you keep saving £1000 and reinvest the interest.  Within 6 years you are receiving more in interest each year than your are saving.  After 20 years you have personally saved £20,000. The interesting thing is you are receiving £14,083 interest for one year and your total accumulated savings are £114,681.  By year 37 you are a millionaire.  Obviously the earlier you start saving the more you will have in the end.  If your parents had started your savings as a baby by the time you are 60 you would be worth a staggering £23 million yet all you have personally saved is £2.73 a day or £60,000 in 60 years.

Many people will claim that 14% is unrealistic and if your money was in the bank I would agree. But, there are investments producing more than 14% each year and your job as an investor is to build your financial knowledge so it is easier for you to find them.  As I write this article in September 2013, I have some investments paying high interest and some paying lower with the average return on investment for September being 14.30%.

For the past 12 months my average return on my investments per month has been

September 2012               16.67%

October 2012                     14.97%

November 2012                15.09%

December 2012                 15.36%

January 2013                      15.44%

February 2013                    15.67%

March 2013                         13.79%

April 2013                            13.39%

May 2013                             13.71%

June 2013                            14.39%

July 2013                              12.36%

August 2013                        11.23%

September 2013                 14.30%

Time and Patience

For compounding interest to work at it’s best it needs time.  As you can see from the chart above the longer you can allow the investment to work the greater the reward.  Unfortunately, we live in a world of instant gratification.  Everyone wants results now.  Learning to be patient and investing for the long term will provide you with incredible results.

The Downside of Compounding Interest

The downside of using compounding interest is that it needs time to become effective and start working its magic.  If you are my age and in your mid 50’s thinking about retirement in around 5 years time there is insufficient time to make it work for you.  If you are 50 and thinking of retiring at 70 then over 20 years you could accumulate a reasonable return.  If you have new born kids in the family then the sky’s the limit if you start them saving today.

Karen Newton is the author of several books on investing and business.  More on compounding interest can be found in Karen’s books Beginners Guide To The Share Market and Surviving 2013.  You can find out more about Karen by visiting www.karennewton.co.uk

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