Simple investment rule number 1: start right now

Transcript

The first rule of investing is to start right now even if it’s just one pound a day or a week. No matter how small the amount you’ll see your money grow quickly, that’s because of a really simple but important concept, compound interest. Another way of saying it is that you get interest on the interest you get paid and then you get paid interest on that interest and pretty soon the interest you earned is bigger than the money you put in there in the first place.

Let’s say you put a hundred pounds in the back, if the interest rate is five percent you’ll earn five pounds interest income in the first year that means you now have £105 instead of £100. The next time you receive interest it will be on your original £100 as well as the investment you received. So now you have £110. Invest 25 pence and it will keep growing and eventually the interest animal will be far bigger than the original sum you put in the bank. If you did that for 25 years at the same interest rate your £100 would become £322.51.

Now imagine that you saved £100 per year at the same interest rate. After 25 years you’ll have saved £2,500 but earned an additional £2,273 in interest almost doubling the amount you’ve saved.

It’s a bit like a small snowball that rolls downhill gathering snow. By the time it reaches the bottom, the snowball is many times larger than it was at the start. That’s how compound interest works. It builds on itself. The longer you save the better. After 35 years of saving £100 a year you would have accumulated £9,032 and £5,532 pounds would have been interest.