Finances can be confusing, so we have created a series of free, educational events, books and online resources to help build your knowledge and confidence.
Compound growth is the growth upon the growth of your money. It can help to significantly boost your savings over time.
Savings is something that many of us want to do, but few actually achieve. Whilst the act of saving seems fairly simple, it’s actually quite complex. Where and when you save your money, and how you do it, are somewhat of a grey area for most people, but understanding these areas will be the difference between working until you’re 90 or clocking out at 50.
However, before you look at exactly how and when to invest, it’s vital to understand what happens to your money when you save, and why you receive gains as well as losses. By understanding this you will have full control over your money and know how to maximise the options available to you, which in turn could lead to a far healthier savings pot for the future.
I’m sure many of you understand the difference between putting coppers in a jar at home and investing thousands in the Stock Market, but why are they different? They are both effectively modes of saving, but one seems safe and will generate no growth and the other appears risky, but could double, triple, even quadruple your money- or of course cost you everything. But why does that happen?
I am a keen golfer; I’ve played since I was a child and absolutely love this sport. I’m also quite competitive, and love a challenge, as you saw when I told you about L’Etape Wales Dragon Ride. A few years ago, on a gorgeous summer’s day, my best man Chris had come to visit from Singapore, so we decided to hit the golf course. We’ve played against each other on many occasions, but this time Chris suggested we add an additional competitive edge.
“I tell you what Charlie,” Chris said, “Let’s make this interesting, and play for money for a change.” Now I like to be cautious with my money, so I suggested, “Ok, if we must; lets’ play for 10p a hole”. Chris works in the world of investment banking, and much like their reputation is less cautious with his money than I am, so his response comes back; “Ok, we’ll start at 10p a hole, but let’s double it after each so it focuses the mind.”
“That sounds like a good idea” I said, thinking that we were only playing for a few pence. “You’d better get your wallet Chris, I’m feeling lucky today!”
So, we teed off and we both put our 10p into an old golf cap, which we were using to collect the winnings. 10p didn’t feel like a lot, so I didn’t feel like this was going to be an expensive round of golf.
I won the first hole, but Chris took the second. The game was on! Thankfully, by the time we reached the halfway house and the ninth hole, I was winning. Whilst we had a quick break, I decided to look into the golf cap; I couldn’t believe it; there was £25.60! But then I realised that meant that the next hole was going to cost me £51.20!
“Chris, are you sure you want to carry on playing for money?”
“Yes, why not? The total can’t go that high, can it? I mean, we only started by putting a few pence into the hat!”
So, on we went. By the time we got to the 12th hole, can you guess what the total was? £204.80! This game was getting expensive, but the prospect of winning spurred me on. I wanted that hat full of cash!
It was at this point that the totals started to explode! We only had 4 holes left to play and by the time we’d finished, I could barely lift the hat! Can you imagine what the total amount was? By the 18th we were playing for £13,107.20 just for that hole! All from starting with 10p.
The morale of this story is not about playing for money, instead it exemplifies an important savings concept. Compound growth is where your money doesn’t just grow, the growth actually increases by reinvesting any interest you make on your money. The effect of the growth on the growth on the growth over time that makes a massive difference to how much your money grows to. Just a couple of % a year might not sound like a lot, but that affect every year makes a huge difference in the future.
How 1% can return almost 40% difference!
As an example, let’s take two 20 year olds, Max and Sam. Both invest £56 per month, every month, until they reach the age of 65. The only difference is that Max receives a rate of 6% of his money and Sam receives 7% of her savings. Only a 1% difference, but take a look at the difference that makes:
Max: Paying £56 per month until age 65 at a rate of 6% = Fund of £153,000
Sam: paying £56 per month until age 65 at a rate of 7% = Fund of £212,000
That’s a 39% difference! All from just 1% difference in the rate of return. It just shows how much a difference a couple of percent can make over the long-term.
Therefore, it’s important to consider how you save, not just what you save. I would recommend that you start to think about getting a good rate of interest or growth in your money, that beats inflation. That way, you should be able to benefit from compound growth and reach your goals much quicker.
The first step in achieving your goals is to discuss your current concerns with one of our qualified Financial Planners.