My Financial Musings...Einstein, Starbucks and the Magic of compound returns

Albert Einstein once joked that the most powerful force in the universe is neither mass nor energy. It’s compound interest, which is what happens when you earn a return on your money and on the return that is already earned. Einstein called compound interest the 8th wonder of the World. 

Albert Einstein once joked that the most powerful force in the universe is neither mass nor energy. It’s compound interest, which is what happens when you earn a return on your money and on the return that is already earned. Einstein called compound interest the 8th wonder of the World.

For instance saving £75 a month - roughly equal one Starbucks a day  -  at a 5% annual return would be worth £10,000 in 10 years - all for the price of a daily coffee…..

How does this work?  Investing in a so called Balanced Investment portfolio of around 50% fixed income bonds & 50% in the stock market, has yielded an average 4.5% annual return over the long term.   The magic is that your £2.50 daily saving,  if left to compound over ten years, could be worth £10,000.

Now say that you have 3 generous benefactors (grandparents, aunts & uncles or friends) who at birth give you £500 each and top it up every birthday with £200 each (£600 a year) until you are 20.  This money is invested in a low cost Exchange Traded Fund (ETF), tracking the main global indices of shares around the world such as the FTSE All World Index.  The FTSE All World Index has returned an average annual return of 10% over the last ten years; this could leave you at 20 with £30,000 to pay your student loans.  The same could apply to investments made at any age, given the magic of time to compound.

This is why the power of compound returns form a fundamental part of My Financial Voice financial education courses and give you the building blocks to understanding finance and investing.

 

“The information in this blog post is provided by My Financial Voice for education and information purposes only and is not intended to be and does not constitute financial advice, investment advice, or a personal recommendation. My Financial Voice is not authorised by the Financial Conduct Authority and does not undertake any regulated activities. None of the information in this blog post or provided by My Financial Voice is a recommendation to buy, sell or hold any investment and My Financial Voice will not be responsible for any investment decisions made by you. The information provided is generic in nature and is not specific to you and you should not make any financial decisions based on the information disclosed in this blog post or otherwise provided by My Financial Voice without taking your own independent financial advice.”