Want to put your money to work and potentially grow your finances? Investing could be a great way to develop your wealth since your invested money could benefit from the power of compounding and flourish over time. Here’s how compounding, supposedly once described as ‘The most powerful force in the Universe’ by Albert Einstein, works.
Snowball effect
When investing, dividends that are payed out and reinvested into a fund compound year on year, which simply means any money you make on top of your original investment is invested back into your plan and could make you more money in the long run. Compounding in a favourable environment means your money could build up – a bit like a snowball rolling down a hill, getting exponentially bigger on the way.
Here’s a hypothetical example to explain how compounding works:
If Sarah invests £7,000 and receives a dividend payment of 3% which is re-invested in the fund, at the end of year one, she would make a gain of £210 and her investment plan would be worth £7,210.
Sarah now has £7,210 invested, which returns 3% dividend, so at the end of year two, she would make £216 and her plan would be worth £7,426.
Following this logic, Sarah's original £7,000 investment could be worth £10,906 after 15 years.
*This example is based on investing £7,000 in a Wealthify Confident Plan and its projected value over 15 years from June 2018 to June 2033.
The projected values in this blog show possible future values for a Confident Plan. These are only forecasts and not a reliable indicator of future performance.
‘How long’ not ‘how much’
Compounding and its effect on investing is more about ‘how long’ than ‘how much’. These days you don’t need to be wealthy to start investing – digital investing services, like Wealthify, let you open a plan with a small amount. However, to take advantage of compound returns, start investing as early as possible and if you can, add regular top ups to your plan. Then it’s a question of sitting tight over the long-term to ride out market ups and downs, resisting the temptation to withdraw your funds, and letting compounding work its magic.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
