With time and patience, compounding can give your saving or investment efforts a massive boost. Find out more about this little-known financial marvel…
When it comes to saving and investing, the key to making serious money is to start as early as you can. Why? Because the sooner you begin, the more time your money has to benefit from a phenomenon known as ‘compounding’ – reportedly once called ‘the Eighth Wonder of the World’ by a certain Mr A. Einstein.
HOW COMPOUNDING WORKS
Often known as ‘compound interest’ or ‘compound returns’, depending on whether you’re saving or investing, compounding works a lot like a snowball rolling down a mountain. While we may start off with a small, fist-sized ball, we can end up with something much bigger as it gradually gains momentum.
START NOW TO MAKE THE MOST OF COMPOUNDING
Whether you’re saving or investing, the phenomenon of compounding can really help your money grow. As we’ve seen above, however, you need to give it plenty of time to allow it work its magic – so if you can, it pays to start sooner rather than later. As the saying goes, the early bird catches the worm. Or in this case, the returns.
HERE’S HOW THE CONCEPT WORKS IN PRACTICE…
- Let’s say you put some money into a bank savings account.
- After a year, you’ll have earned interest on that original sum.
- In the second year you earn interest on both your original capital plus the first year’s interest.
- Then in the third year, you earn interest on your original capital plus the first two years’ interest.
- And so it goes on, like a snowball gathering size and speed.
The same thing applies if you’re investing – the difference being that instead of earning interest on your interest, you can potentially earn returns on top of any returns you’ve already earned. Just remember to bear in mind that the value of investments can go down as well as up, and you may get back less than you originally invested. So rather than rolling down the mountain in a straight line, our snowball may have a bumpier ride.
The above example is hypothetical and does not represent and investors particular experience. The above example excludes the impact of product charges and tax. Of course, it’s important to remember that right now interest rates on savings accounts with Irish banks are at historic lows muting the impact of compounding when you choose to save in a bank savings account.
The value of your investment may go down as well as up. If you invest in this product you may lose some or all of the money you invest. These products may be affected by changes in currency exchange rates.