- Compounding means growth building on growth, and it doesn’t need interest.
- Starting ten years earlier can add far more than it costs.
- Real returns don’t arrive in a straight line.
Compounding sounds like a banking word, so people assume it means interest. It doesn’t have to. If you own part of a business and it grows, next year’s growth applies to a bigger slice of value. No loan is involved.
The sum
Say you invest £200 a month and it grows at 5% a year after fees. This is an illustration, not a forecast.
- After 30 years you’ve paid in £72,000, and it’s worth about £166,000.
- Start ten years later and you’ll pay in £48,000 over 20 years. It’s worth about £82,000.
Those extra ten years cost £24,000 in payments and add about £84,000 to the result. The later years do most of the work, because they have the biggest pot to work on.
What this means for you
- Start small rather than late. £50 now teaches you more than £500 in five years’ time.
- Don’t interrupt it. Selling after a fall removes money from the years that matter most.
- Watch costs. Fees compound too.
The catch
Real returns don’t arrive in a straight 5%. Some years will fall, and nothing guarantees the average. Here’s how to think about that.
Try your own numbers on the investing calculator or the retirement calculator.
If you spot a mistake, tell us and we’ll fix it.
Capital at risk. Investments can fall as well as rise, and you could get back less than you put in. Past performance is no guide to the future. Nothing here is a recommendation to buy any fund or platform.
