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.
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.
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