Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
When it comes to long term investing, one of the things you may have heard about but not really understood is Compound Growth.
Did you know that as well as earning returns on the money you invest; with compound growth you also earn returns on your returns?
This is a way you can make your money do more over the long term when investing. Warren Buffet has said “Over time, it is a simple concept that accomplishes extraordinary things.”
You aren’t just making money on your investment; you’re making money on the growth of your investment.
For example, you put £10,000 into an investment. In the first year, you make a 5 % return, giving you £10,500. In year two, you again make a 5% return, only this time it is on your initial investment and year one return, 5% of your £10,500 which is £525, giving you a total of £11,025. In year three, you again make a 5% return, this time on your £11,025, which means a £551.25 return, giving you a total £11576.25.
That’s the secret of compound growth. If you get started and stay invested over the long-term, it takes care of itself. The longer you remain invested, the greater the potential returns on what you’ve already invested.
Think about how you could apply this concept to your own life. Perhaps you’re investing part of your salary each month over several decades towards retirement. By keeping your returns in your account, you can benefit from compound interest.
This is why investing early in your life can make such a big difference, it gives you time to build both your money and the interest earned on your money.
Make the most of compound Growth by adding a Direct Debit
Arranging a monthly direct debit is the key to stress free investing, it doesn’t get any simpler. Consistently paying yourself first after payday with a portion of your earnings going straight into your investments ensures you stay on target. In short, reach your financial goals sooner with minimal effort.
This would help you do even more with compound growth as it ensures you’re always topping up the amount you’re earning returns on. You would be investing the same amount each month, but the returns have the potential to keep growing.
In this example, a £300 monthly Direct Debit starts off with a return of £99 in the first year, but by year 15 the total compound growth on your investment of £54,000 is £26,500 (assuming a 5% annual growth rate after fees), giving you a total pot of £80,500.
That’s the power of automating your investing, so you never miss a payment, and compounding growth over the long-term.
If you haven’t yet set up a Direct Debit, it’s a simple process that you either take care of yourself or we can guide you through.