To put it simply – compound interest is when interest earns interest.

Compound interest is the result of reinvesting interest, rather than paying it out, so that interest on the next period is then earned on the principal sum PLUS the previously accumulated interest.

The result over time has a snowball effect, where the portfolio starts growing quicker and quicker the longer it is invested.

The benefits of compound interest require patience and time. This scares many people who live in a world where everything is instant and they are looking to make a quick buck. Nonetheless, the returns that compounding creates over time are well worth the wait.

The example on the right shows the gains of two portfolios called the 'Spender' and the 'Compounder'. The Spender spends all the interest that is earned and the Compounder reinvests all the interest that is earned. The differences in the gains of the two portfolios becomes even larger as time goes by.

Over a 20-year period, the Compounder's portfolio gain is more than FIVE times the gain of the Spender's portfolio.

This example is based on 10% annual interest.

The value of getting financial advice from a qualified financial adviser should not be underestimated and is highly recommended. It may help you reach your goals.

Speak to a financial adviser to help you consider your options.

Contact Alexander Forbes Individual Advice Centre (IAC):

Tel: 0860 100 444 or Email: iac@aforbes.com