AIBU to think compound interest is surprisingly powerful over time?

[shocked2026]

To think that compound interest is WILD? I know it works negatively with mortgages etc but also over time with tiny amounts of money it can grow exponentially. I realise that many people probably know this already but I didn’t realise how much of an effect it can have!

I agree with pp that the issue is having that much money to 'lose' every month - we put away £100 savings a month but then dip into our savings account for christmas/holidays, we wouldn't risk having money put somewhere that we couldn't access or might lose entirely

But yes if you have a long term savings account, looking at the best interest levels makes sense

You don't just save one £1 - you save several £s each month for 30 years then see how much you'll gat back. The Boomers cracked it.

Cahoot has a 5% saver, but the maximum that can be saved per year is 3000 per person

I'm not sure how you're working that out?

£200pm for a year at 0% is £2400 and doesn't grow at all.

If you invest that same amount, don't add any more after the year and it doubles every 7-8 years you obviously end up with more?

After 7 years you have £4800, after 14 years £9600 after 21 years £ 19200 after 28 years £38400 etc etc.

My investments over the past few years have "earned" more each year than I make from my job. I've had returns of around 20%pa. The last few years have been exceptional and are unlikely to continue at this rate because that's the nature of the stock market, over the long term they'll average out to around 8-10%pa in nominal terms.

Yes, it's why our kids have ISA's and pensions maxed out and have done since they were born. The advantage it gives them regarding financial freedom is wild. The top 25 ISA holders have £11m in accounts per person.

And yes, I am aware that they could spunk the ISA's when they are 18's but they have been told if they do that they won't get a penny more. Plus, they are aware that the financial freedom we have is because I have the backstop of the various investment vehicles given to me by my DP's in a similar fashion starting almost from when they came out (I think the first PEP was dated 1990) meaning that whilst we work, we aren't tied to a pay check in the same way others are.

Sorry that wasn't one of the options I meant, one option was 200pm for a year and compound interest, the other option was 200pm indefinitely.

My point was the regular (substantial) contributions is the important bit to end up with a huge pot, not the compound interest.

(Although to be totally fair the 200pm should be uprated in line with inflation.)

@Plantlady10 when you research you will see how it works

Yes my dad started investing in the 80s in PEPs and he was an ISA millionaire by the time he was 80. I'm not a dividend investor but that was his preferred method and some years he made £70k in dividends alone.

We were very average growing up, not wealthy at all but simply by investing small amounts regularly over 50 years he ended up with over £2m. He passed on the habit to me and I'm passing it onto DCs.

But you're not comparing like with like so it's meaningless. And if you can invest £200pm indefinitely why would you invest it at 0% when you can get 8%? Doesn't make any sense whatsoever.

To give you an example, I’ve been investing in my pension for 10 years. At the start most of my pot was made up of contributions, 10 years on, 40% is pure growth and this number will only increase as the growth outpaces my contributions which is what happens with compounding.

Im not getting this. Of course if you afford to invest your interest instead of spending it , you'll be better off?

I so dont get this

By year 5 the amount you're making in returns per year is more than what you're contributing per year.

Tried to add an image but it's under review! A table of investment returns!

this falls into well, duh.

to teach it to our child, we started a private pension for her when she got her first part-time job. We personally contributed the maximum allowed amount into the fund so she didn’t have to be out the money since she had earned so little. She is only 17, is watching her retirement fund grow, and is excited about adding more to the principle.

I agree. The ‘magic’ is all about having £200 spare a month, £200/ month which is so totally unneeded it can be locked away for 30 years (or however many it is).

Two tier society, the haves and the working have nots.

This! People don’t know what they don’t know. There is such much financial advice I only got from stumbling upon it. But that all happened in my 30+. Wish I had learned a lot more a lot younger.

Exactly, 5% interest on a really large number can outstrip the yearly contributions.
But that really large number only came about because of the regular repeated contributions, not because of the compound interest.
It's still "only" 5%, and it's the large base amount that is doing the work.

Sure, 5% or 7% is not to be sniffed at but saving gradually takes time and that's the powerful bit in my mind.

I think we're violently in agreement across the thread, to start early and save whatever you can, but perhaps it's my maths head telling me it's the saving up that's important for the orders of magnitude and the interest or investment return is just a healthy bonus on top

As Chris Tarrant would say, it’s only easy if you know the answer. Most people don’t.

Maths is taught in schools however finance is not. Math can of course be applied to finances and finances are often used as example in math but in my opinion they are two distinct subjects and personal finances and the real life consequences of managing finances are not properly taught

Sorry,what is compound whatsit?

I was at primary school 1960 and it was taught in my school, not that I could fully work it out but I realized there was a big difference. We were also taught grammar but neither were taught in my secondary school.

Yes but if you wait until only 10 years before retirement you'd only have £1.35. And over 5 years only £1.16. And hopefully you'll earn more than 3%pa. An investment account should earn about 7%pa

I still prefer to put my money in an isa. I'll open my 5th one in April. I'm happy with the 4% and no stress. It's for a house so I can't risk losing it

The late Charlie Munger, Warren Buffet's No.2 man, said net worth explodes after the first $100,000 due to compound growth.

“It’s a bitch, but you gotta do it,” Munger said. “I don’t care what you have to do — if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.”

Assuming 8% growth from the stock market, that $100,000 will generate $8,000 return per year. This is the first tipping point where the investment return starts to exceed the contribution.

The second tipping point is when investment return exceeds your salary.

The third tipping point is when your investment return covers your expenses indefinitely. You can now retire.

Compound growth is the thing over decades that ultimately gives you the exponential growth that pushes you past the tipping points.