How does compound growth work?

Compound growth is a powerful concept that effectively makes your money work harder for you

In fact, it’s so impressive that Albert Einstein is said to have dubbed it the eighth wonder of the world

Here’s how it works:

When you put your money into a savings account or an investment

Compound growth is the extra money you can earn on top of your initial investment

It’s called ‘compound’ growth because, as time goes by, any investment growth or interest you earn starts to build on itself and potentially grow along with your original money

Let’s say you invest £1,000 and it achieves 5% investment growth each year

At the end of the first year, you’d have an extra £50 from the investment growth, bringing the total to £1,050

But here’s where compounding comes in:

In the second year, you not only earn 5% growth on your initial £1,000, but also on the £50 you earned in the first year

So you’d earn £52.50 in your second year, making your total £1,102.50

As time goes on, compounding can become more significant – it’s like a snowball effect

Any growth you earn starts to generate its own growth, which means your money grows faster

The longer you leave your money invested, the more opportunity it has to compound, and the larger the value of your investment potentially becomes

Compound growth can work wonders over long periods, helping you to reach your financial goals

It’s a great incentive to start saving early and consistently, as the more time you have, the more impact compound growth could have on your investments

The value of an investment can go down as well as up and may be worth less than invested.