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Why I wish they’d taught me about compound interest at school

Were I able to go back in time to impart one piece of wisdom to my teenage self – one nugget that would have made all the difference to my financial future – I would somehow engineer the absence of my maths teacher for a single lesson.

Then, heavily disguised as fresh supply teacher meat, I would instruct the class in the power of compound interest.

It wouldn’t take long, needn’t tear a hole in the fabric of space-time, and it would have made a far deeper impression on me than another drone-a-thon about quadratic equations.

Because everyone likes the idea of money for nothing.

Alas in reality what little money I did lay my hands on at that time went on instant gratification. You know how it goes.

If only I had understood what a mighty money tree I could grow by saving even a pitiful amount early on and watering it with time and compound interest!

I wish I'd learnt about compound interest when I was young

How compound interest works

Compound interest is the astonishing multiplier effect1 of interest earned on interest, over time.

It works like this for a saver who sticks away £1 and earns interest of 10%:

Year Principal Interest @ 10% Total
1 £1 10p £1.10
2 £1.10 11p £1.21

In Year Two, you don’t add a bean to your savings, yet you still rack up more interest than the previous year (11p instead of 10p), because you also earned 10% interest on your interest.

Big wow. It doesn’t sound so life-changing – until you scale up the amounts and timescale involved.

Once that self-feeding, compound interest mechanism gathers momentum it creates a runaway money snowball that can transform your financial position.

But time is needed to generate that momentum. The sooner you start saving and investing, the more dramatically compound interest can work for you.

Compound interest unleashed

Let’s consider two investors: Captain Sensible and Captain Blithe.

From the age of 25, Captain Sensible invests £2,000 per year in an ISA for 10 years until he is 35. At 35 he stops and never puts another penny into his fund again.

Captain Sensible then leaves his nest egg untouched to grow until he hits age 65. He earns an average annual return of 8%2 and when he looks at his account 30 years later, he has £314,870 to play with.

Captain Blithe, meanwhile, spends the lot between the ages of 25 to 35. Only when he hits 35 does he sober up and start tucking away £2,000 per year in his ISA. He keeps this up for the next 30 years until he reaches 65.

Captain Blithe earns an average annual return of 8%, too. He ends up with £244,691.

To recap:

  • Captain Sensible has invested a total of £20,000.
  • Captain Blithe has invested a total of £60,000.

Yet Captain Sensible’s pile is worth over 28% more than the late-starting Captain Blithe’s – even though Sensible only invested a third of the amount.

Do it. Do it now!

Remember our ho-hum interest table above? Let’s dial up the years setting to 30 to see how she performs:

Year Principal Interest @ 10% Total
1 £1 10p £1.10
30 £17.45 174p £19.19

After 30 years at 10%, you’re earning almost twice your entire initial investment as annual interest. That’s the power of compound interest.

Of course, the only place you can hope to get a 10% return these days is the stock market, and stocks go down as well as up. Real-life returns are more volatile, but the principle is rock solid.

Compound interest is an offer you’d be mad to refuse. Have a play with our compound interest calculator to see how much you can achieve.

When you’re young, time is on your side. Make the most of the once-in-a-lifetime opportunity by sticking some money away (anything is better than nothing) and let compound interest get to work securing your future.

You’ll be laughing later. (At me, as I snivel and regret my youthful folly).

Take it steady,

The Accumulator

P.S. – Even if you’re not so young, now is still the best time to start.

  1. At this point most compound interest articles like to quote Albert Einstein as saying: “The most powerful force in the universe is compound interest.” It seems more likely that this is an internet meme than an Einstein quote, but it lives on because it would be fantastic if true. []
  2. That is, an 8% annual average return over the entire 40-year investment period. []

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{ 84 comments… add one }
  • 1 Robert Lalor December 20, 2011, 11:49 am

    Of course even more remarkably, by the age of 65 if you were to take your interest at 8% that would be paying Captain Sensible:

    £27,693 annually

    and Captain Blithe

    £19,575 annually

    which remarkably means that having paid a total of £20,000 in spread over 10 years, Captain Sensible can annually draw more than the total amount put in without decreasing the amount of capital in the pot in his retirement.

  • 2 Ben December 20, 2011, 11:53 am

    There are geneticist’s claiming that the 1st person to live to 1000 has already been born.

    This development would provide the same effect as your time machine in terms of ability to compound some money into your coffers.

    Which makes me think for all the myriad of micro and macro economic effects that supposedly determine interest rates, the most important (by some margin) has to be average life expectancy. There is an implicit tie between the two variables that makes any other relationship seem a bit irrelevant and non-sensical.

    If we were like the mayfly and lived for a day then an interest rate of 8% on our savings would be of no interest, likewise, if our biochemistry can be pimped up to give us a millenia then we could sit around watching ‘cash-in-the-attic’ safe in the knowledge we will become infinitely wealthy soon enough.

    Also poses the question, how much would you be willing to pay BUPA for the relevant tablet?

  • 3 The Investor December 20, 2011, 11:57 am

    @Robert — I couldn’t agree more! Always good to look at things from the income perspective, too.

  • 4 Robert Lalor December 20, 2011, 12:59 pm

    I thought I should add that if anyone does have a young person in mind, the old classic ‘The Richest Man in Babylon’ (not the King James versions!) would be a great start. I believe you can get it for free on the internet these days. Personally, I would like to these this sort of material get into schools in a money management class from a young age… would probably be the most effective economic policy of all time.

  • 5 The Investor December 20, 2011, 1:34 pm

    @Robert — It’s a great book, though I wonder if the average child would read it with a straight face. I seem remember a bit of chortling myself when I read it!

    There seems to be a free PDF version here: http://www.ccsales.com/the_richest_man_in_babylon.pdf

    For those with young relatives looking for a gift, it’s on Amazon for less than £5, and also on Kindle: http://amzn.to/sqTFqp

  • 6 Evan December 20, 2011, 5:24 pm

    I think Young Evan might be even denser…the lesson would need to have more than just an explanation of compound interest. It would need the statement “if you don’t buy all those drinks at the bar you can then use the money to help with compounding” lol

  • 7 ermine December 21, 2011, 11:45 am

    Hmm, well, I want to be the party pooper on this one 🙂

    Firstly, that 8% sounds like 8% in numerical terms. What matters is the rate in real terms, as eroded by inflation. The value of money halves every 10-20 years to inflation, so sensible has actually put more money in than is allowed for. Money saved earlier is simply worth more than money later.

    Secondly, you need to take a whole systems view of the participants’ lifetime finances. For most people money is much shorter early in their careers, because they are new to their jobs, so wages are lower, they are trying to buy/save to a house, they may be thinking of having children. So in practice it is much easier for an older guy later on in their career to save much larger amounts. They are likely to be further up the pay scale, they may have paid off their house.

    For me, in tha last three years of my 30 year career, after I paid off my house I saved a far higher proportion of my wages than for the rest of my career. So as a result, the revenue from those savings, at a SWR of 5% will be about half the revenue from my pension, built up 20+ years from my late 20s. If I were prepared to work another two years, I would match the revenue from pension savings I had started 20 years ago.

    The one area I would agree with the compound interest argument is for aspirational (and rich) parents, to hit a savings vehicle when their child is born. But then it’s not exactly the newborn doing the saving 🙂

    I’m with ERE on this, compound interest is overrated. Extreme saving trumps compound interest, any time. Live well, live within your means, don’t inflate your lifestyle too much and as you get older extreme saving gets an awful lot easier, and the risks of Government rule-changing on tax-deferred pension savings reduce, because you are exposed for a shorter time.

    Fortune favours the bold, not necessarily the young IMO 🙂 If you take the ERE route you can be young and bold. So there’s no need to weep into your beer if you didn’t start saving at 23.

  • 8 david stuart December 21, 2011, 1:15 pm

    How i wish i was taught finance at school instead of algebra.Id be very well off.

    debt/mortgage o/p/credit cards/compound interest

    the biggest help by far has been the internet.

    the kids today with iphones have instant access to info—good/bad

    was at chippy last night–all 4 girls waiting in que—using iphone the whole-time–texting/surfing

    its a diff world

  • 9 The Investor December 21, 2011, 2:16 pm

    @ermine — Excellent response to the piece, thanks for going into such depth. I agree to an extent with what you’ve said — I don’t think it contradicts the article, it just fleshes out the bigger picture.

    That said, I would raise a few further points. It’s true that 8% is nominal (i.e. not accounting for inflation) but if a young person ignores compound interest and keeps the cash in a jar by the side of the bed / the family vault, it’s still eroded by inflation. The fact that inflation should be taken into account strengthens the case for compound interest, it doesn’t weaken it.

    Always worth bringing up the time value of money, which all students of investing should have a better appreciation of.

    That said, I have a contrary view of how young people should spend their cash. It’s true that most young people don’t have a lot of disposable income — and too many have debts — but I’d argue where they do spend that money isn’t always appropriate, either.

    As I’ve written, young people are already rich. Their good looks, health, potential, and time horizon are all massively valuable, but they need to make use of it. I think forgoing the odd pair of designer sunglasses to put money into an ISA is a sacrifice well worth making, or better yet getting a second job or similar to generate extra income.

    (Of course they should pay down debt first, and, where there are *clear* financial advantages, then it may be better paying for extra qualifications or equipment or training to boost their future prospects. A Phd in Medieval Bell Ringing In The Normandy Region does not fit my definition of a good investment, from a financial perspective).

    Yes, not every young person is going to be in a position to do (or want to do) this, but this isn’t a blog for everyone! 🙂

    As for Jacob, while I much admire his thinking and his writing — and the guest posts he wrote here on Monevator — I’ve always had an issue with the idea that he showed you could retire convincingly — as most people understand the idea — on a few years work and ultra hard saving.

    Jacob showed that in a warm climate you could opt out of work (not retire) to live in a caravan off the main drag. He’s about lifestyle design, not early retirement in the sense that those words are commonly used.

    If you want to aspire to do that, then quit your job now, sell your house and most of your assets (I know you don’t consider your house an asset, but this illustrates again exactly why I disagree!), invest the resultant multi-six-figure capital and buy a mobile home in Scotland as an early retiree.

    If you don’t, then I think that makes my point… 😉

  • 10 ermine December 22, 2011, 2:11 am

    > multi-six-figure capital

    Fortunately I Googled what this meant before thinking WTF, I don’t have a net worth of a megapound and never will have 🙂

    Jacob is younger than me, which means I will get old before he does. I at least have a better healthcare system, inasmuch as it is free at the point of use at the moment. I try and avoid it, but on those rare occasions I have needed it it delivered.

    However, whenever I see the magic of compound interest being sold, I always want to counter it. I haven’t used it, and I am within less than a decade of the end of my conventional working life. If Jacob is anomalous, how about Money Mustache – most of your readers could achieve the MMM way of early retirement. Again, compound interest was not a key part of his solution. I would put it to you that your own position, a little bit less than halfway through your working life, has been achieved through frugality and living below your means, not compound interest. You’re just not old enough for it to have done anything useful for you, unless your parents set up that CTF when you were 0.

    That’s the point I’m driving at. The essence of achieving wealth is to live below you means – spend less that you earn. Bigtime. That is what accumulates, and that is what those schoolkids should be taught. Not the empty dream that there is some fairness fairy called compound interest that will fix it all for them. They could combine it with English Literature and take the Micawber principle.

    Believing in the magic of compound interest is like believing in Santa Claus. It’s a nice story, but it’s one you grow out of. Read your GFs mags, they tell you you can have it all. You can’t have it all, though you probably have to get to be a cantankerous old git before you know that. You have to decide what you want to have.

    Compound interest will deliver for you, but only if the economic system survives intact over your lifetime, and even then, it only delivers for you when you’re about to croak. Even if we lived 1000 years, as the poster above indicated, it would only deliver towards the end of your lifetime, because there would be a desperately increasing world population using more stuff all the time.

    Compound interest has one purpose, and that is to tackle the compounding of inflation. It’s why your 8% win is set against the 3-4% long term inflation the UK has had to deliver a real return of 5%-ish. Which is what you live off. Resulting in the approximate rule of thumb that to be independently wealthy you need to have diversified capital of about 20x your desired annual income. Other than that, compound interest is an empty dream. If you could live in suspended animation for half your life, yes, compound interest will do it for you. It changes the figures, but as you live, governments promise more than they can deliver and print the extra money to pay for it…

    > I think forgoing the odd pair of designer sunglasses to put money into an ISA is a sacrifice well worth making, or better yet getting a second job or similar to generate extra income.

    I sweat buckets to fill my ISA year on year. 10k is half the national average wage post tax. Couldn’t agree with you more that passing on the designer whatever to feed into an ISA is well worth doing, but filling one is a seriously big ask.

    > better yet getting a second job or similar to generate extra income.

    That’s Calvinist. The point of being young is to roll with the joy of being good looking and being able to stay up all night. No to sock it away in an ISA. They should stick to rule #1 – over a year, spend 90% or less of what you earn.

    OK, I’m done with being the site curmudgeon on this. I don’t cry into my beer that I didn’t start saving for a pension when I was working for the BBC at 28. I sprang my BBC pension contribs at £700. At a 5% annualised real interest rate that would be about £2400 now. Big deal. Tax-free it would have been maybe £5000. I’m happy enough to give my younger self that £700, he needed it more then 🙂

  • 11 The Investor December 22, 2011, 10:35 am

    @ermine — Thanks for the follow-up. I’m going to argue strongly against what you’re saying, for the sake especially of young readers reading, as I think it’s dangerously misleading.

    I know where you’re coming from, having followed and enjoyed your blog for years, but the thousands reading this post in the months and years ahead will not have. I don’t want Monevator to help put people on the exactly the opposite path that I set out to postulate, and that we post on every day – i.e. at a minimum, realistically aiming to achieve financial security within their lifetime, or better yet some financial freedom. (Achieve that and you’re way ahead of much of the population, remember).

    Let’s start with where we agree. Specifically I fully endorse aggressive saving.

    But your comments are conflicted, in that you chastise me because I say that’s what the young should do, yet you salute Jacob for promoting the far more aggressive frugality and saving path.

    You’re also at cross purposes IMHO because you say it’s very hard to for you fill an ISA — and you’re someone in their mid-50s without dependents who has pretty much turned his back on conventional consumerism, and even aspires to grow your own food! 🙂 — yet you think most people should be following this extreme saving path.

    It’s because it’s so difficult to save a lot that people need to save and invest at least a little for the long-term, from as early as they can.

    I agree it’s very hard to save a lot of money every year. That’s exactly why young people should save *as much as they can* every year, within reasonable limits, rather than destroying themselves thinking they’ll just save 75% of their salary when they reach their 40s or 50s or whatever. It won’t happen for most of them.

    You don’t live off the 5% real return while you’re saving, as you state. You reinvest it.

    As you know, a real return is after inflation. You are resistant to the idea of getting a return on your investment for some reason, perhaps because of the rotten past decade. But 5% real is slightly less than the UK market has delivered over the long-term. i.e. If anything it’s very mildly cautious. It’s certainly a more sensible benchmark for somebody to plan their investment operations around than a gloomy prognosis of the world ending that they might also have read in the 1960s or 1970s or 1980s or 1990s…

    A 5% real return over 30 years is a grand thing. You’re in your mid-50s, more or less, so have been working for 30 years. Let’s say somebody saves £300 a month into an equity-based ISA or SIPP for 30 years, reinvests all dividend income, and gets a 5% real return using cheap passive principles. They could expect to have a pot in today’s money of £251,000 — five times higher than the typical 56 year old’s pot today, and 25 times higher than that of the average woman (Source).

    And I’m assuming there they just keep saving £300 a month. In reality they’d increase their monthly savings massively as their salary increases, as you noted in your first comment. (Post the imminent NEST pensions there’ll be a mandatory employers contribution, too, which will add a few more percentage points a year). By saving and sensibly investing say 10% of their annual income over 30 years, they’ve a good chance of retiring modestly financially secure, even at 55 let alone 68 or whatever the official age is by then. This is largely due to compound interest in conjunction with tough but realistic saving.

    You have ducked my point on Jacob — why don’t you do it if it’s so great? — even while raising the extremely pertinent point that in the UK we don’t even have to worry about health care costs, at least compared to the US. You live in the South East, where the average house price is £282,000. For reasons that I find inexplicable, you do not understand that your house is a financial asset. Jacob would not make such a gross mistake — if he had then his form of early retirement would be utterly impossible.

    You could sell your house tomorrow and retire with, I’m reasonably guessing, much more capital than Jacob and his fans saw fit for him to live on for 40-50 years. And yet as you say are 20 years closer to the finishing line! (As you know, Jacob has gone back to work, and I’ll take him at his word that it’s not for the money. But the fact is most smart people’s choice for early retirement is not living on 1/3 the average wage in a mobile home in a country with poor public healthcare).

    As for me, it’s true hard saving and reasonable frugality have accrued much of my gains to date, compared to the impact of compound interest. But I’m still young-ish, and we’ve just lived through the worst bear market since the 1930s. Give me a 1990s stock market bull run and I’ll be modestly wealthy and still in my 40s. This past year is the first where I’ve earned more than about £45,000 a year, so if/when I do it won’t have been achieved on mega-bucks!

    I think your point of view is overly influenced by the bearish conditions of the past few years. It’s true that those who believe the capitalist system is going to end and who dismiss the investment returns of the past 100 years as an aberration can find better use for their time and energy then investing. In deciding thus, they’ll be just like the millions before them who lived for the now and regretted it later, albeit in a new black haircloth variation on 1960s beatniks.

    Even then those budding doomsters could hedge their bets, and save my proposed 10% a year into an accessible ISA from as soon as they can. If they get into a position where they can start saving 50%+ of their income as you propose, more power to them. If such savings are feasible for the average person, then 10% a year even when young certainly is. If the world really looks like ending, they can cash it in for spam and petrol in the end days. 😉

    None of the comments above are meant as personal attacks, so I hope I’ve sufficiently tempered my language. 🙂

    I thank you again for raising the opposite point of view on compound interest, and giving me the chance to explain to readers — particularly young readers — why I think they’d be making a big mistake in following you.

  • 12 The Accumulator December 22, 2011, 2:57 pm

    @ Ben – I guess the only problem is that you’d need to leave the money untouched for the first 500 years to give yourself enough to live on during the second 500. That would test anyone’s patience.

    @ Robert – funnily enough I do have someone in mind. Although I’ve got no reason to believe they’re interested in finance. I wasn’t either – I knew nought about the withdrawal of the Bank of Mum & Dad, family responsibility nor the warping effect of the passing years 😉

    Thanks for suggesting the book (and thanks to The Investor for the link), I think as long as someone is in possession of the knowledge then it’s up to them what they do about it.

    Sometimes I wonder if this stuff is deliberately not taught. Given consumerism is the engine of the economy, and past exhortations of government ministers to “Shop til we drop,” I’m not sure that the upper echelons ever considered it to be in anyone’s interest to teach people prudence.

    @ Ermine – not sure there’s much oxygen left in the room on this one, but must say am enjoying the debate. I don’t know why you posit this as a grand clash of two opposing theories.

    You’ve obviously made up for lost time as I am now doing. My saving is extreme not in the ERE sense but in comparison to my previous lifestyle and most of those around me. Nonetheless, it’s a fact I would be better off now if I’d started saving 20-years ago – and enjoyed the benefit of that interest compounding.

    Perhaps I’ll be able to make up for all that lost time, but I might lose my job tomorrow and not get the chance. I might be invalided, someone close to me might be invalided. Who knows?

    Point is, do it while you can because you don’t know what’s around the corner. And do it when you can get the maximum leg up from compound interest. That moment is today, not tomorrow.

    Incidentally, I deliberately chose the 8% figure, as The Investor has alluded to, because it amounts to the real historical return of UK equities plus 3% long-run inflation.

    Where I definitely agree with you is that compound interest isn’t the magical answer to life, the universe and everything. But then nothing is, and no-one believes in magic do they?

  • 13 Millie December 22, 2011, 8:14 pm

    Since I am a young person, I have decided to comment on this post for no reason other than to point out young people can – and do -save, although maybe us sensible ones are in the minority!

    I am 24 years old. I have a degree (BSc, and MSc almost done) and the accompanying debts! I work for a charity and thus make a lot less than a graduate in my field can expect (my current pre-tax wage is £15000 – clearly I’m not in it for the money….).

    Since student loans in this country are low interest and taken out of wages before you’re paid, assuming you earn enough, I consider them a form of tax and ignore them. So I’m “debt-free”.

    I live at home – which any financially-savvy 20 something should be doing if possible. House prices and rent are ridiculous, and at this age parents are more likely to put up with you! Now you’re an adult you can pay rent and contribute to dinner table chatter! Even paying rent (which I really think anyone should do if living with their parents whilst earning), it’s much cheaper than running a house, and you can save income as a result of this.

    I think that when you’re young you can save specifically because you’re young. At this age I don’t have to worry about kids or houses. There is plenty of time for that in my future, and for now I can take advantage of low rent and low living costs and save as much as possible, for whatever future I choose.

  • 14 The Accumulator December 23, 2011, 8:10 am

    Hi Millie, all power to you. Are many of your peers doing the same thing? And do you have any specific goals in mind that you are saving for?

  • 15 Millie December 23, 2011, 8:18 am

    My friends are very British and don’t talk about money! Hehe. My sister and some of her friends (who are 23/24) are living with parents or in parent-owned houses for the cheaper living costs, and saving the difference, so there are a few of us 🙂

    I’m not really saving for anything. I don’t know what I want to do one week from today, let alone in a few years! I’d like a decent emergency fund and eventually a house deposit (I want to buy a really rundown cottage and then renovate it), but at the moment I’m happy to just watch the balances grow without worrying too much about what it will be used for.

  • 16 Phil November 19, 2014, 1:16 pm


    On the maths side of of compounding, ignoring tax/ different returns etc etc, how does it stack up if you have multiple accounts/ investments?

    Ie: If you have one of the following setups:

    – one 100k portfolio with say a single vanguard lifestrat.
    – one 100k portfolio with one provider but has multiple individual funds/ stocks etc.
    – or a range of portfolios with a number of different providers.
    – also, splitting your investments between isa/ sipps / other etc or holding all within one wrapper?

    Assuming the initial returns are the same from any option, Does the effect of compounding work out the same, as ultimately you have invested the same amount of money into the same funds and got the same return. The only difference being the money being split around and say compounding effect on 100k being the same as compounding effect on 5 lots of 20K once all totted up?

    Hopefully that makes sense!!

  • 17 Phil November 19, 2014, 1:18 pm

    ps. or does the effect of compounding increase if its working on a larger pot, ie sort of exponential increases that doesn’t happen if you split your investments up?

  • 18 The Investor November 21, 2014, 11:45 am

    @Phil — If you ignore costs/taxes/returns (i.e. if you assume they are all the same) then the compounding effect would indeed by the same all added up as if it was one lump sum.

    In reality you’re likely to have a range of returns, taxes, and costs, of course! 🙂

  • 19 Jim Wang February 2, 2016, 1:19 pm

    I always love seeing this calculation because it really helps people, especially younger people, understand how important time is when it comes to their savings. Understanding it is a little like understanding why life insurance becomes so expensive when you’re in your 30s… it’s because of that final year (or years). Every year you wait doesn’t cost you a single year, it costs you the 30+ years of compound interest you won’t be getting.

  • 20 Nicholas Stone February 2, 2016, 1:30 pm

    I’ve actually had this thought before, about devoting a lesson or two at school to index investing.

    It would at a stroke solve the pensions crisis.

    I lost half my savings to a Zurich Vista plan – I out in £44,000, it’s currently worth £31,000, with a surrender penalty of £8,000.

    If I’d put my money into one single world index fund in 2010, it would be worth £55-60,000 now.

    I would weep but there’s nothing I can do about it except be thankful I learned about index investing after just 4 years of being fleeced.

  • 21 John B February 2, 2016, 1:36 pm

    I play a computer game on my phone, Ingress, where occasionally you acquire an item, a MUFG capusle, which you can put 100 other items into, and they earn 1% interest, in terms of random replication, PER DAY. I’m so pleased to get one of these as I hold back game benefits until its full and then play with the interest.

    I’m a natural saver, but if we could get more of the young exposed to such educational devices, the lesson might be learnt. I suspect though that if a VISA capsule were on offer, many would borrow with it to bring forward their fun.

  • 22 Lee_G February 2, 2016, 1:46 pm

    In the interests of adding an extra ‘young’ person’s voice the topic I will offer my tuppence. I’m about to tip over into my 30’s this year but I’ve been reading Monevator for about 3 years now. I still remember reading the ‘Young people are rich’ article and bought (and read!) Tim Hale’s Smarter Investing on recommendation from this community. Thanks for all the hard work!

    I’m definitely in the select few financially minded in my group of friends and even most of my (older) colleagues. Many friends discuss aspirations of owning a BTL business one day because it just so easy to buy a doer-upper, fix it and rent it out then rinse and repeat, isn’t it? However any discussions on being over-invested in a single asset class or comparisons in rates of return on their investment versus other classes are met with blank faces.

    I have many colleagues that have two leased cars in their household, huge houses and credit card debt. For what it’s worth our offices are not city-based, either, so it’s not just the city dwellers that get caught up in these traps! So I see these bad habits in older generations than my own.

    Between myself and my wife we save around 60% of our income – more if the mortgage payments are included. We are a ‘Double Income No Kids Yet’ couple so expect this percentage to be slashed if a little one comes along, but I’m happy to let our savings and investments pick up the slack through compound interest during this time. As well as the compound interest I think having this money invested at an earlier age removes the temptations of lifestyle inflation if it were to sit in a bank account begging to be spent.

  • 23 SkintStudent February 2, 2016, 3:35 pm

    I’d like to sit somewhere between ermine and The Accumulator on this. The example in this article (and almost every other I’ve seen expounding compounding) cheat. Sorry for the harsh wording, but that’s how it appears to me. Deliberately choosing 8% to reflect reality, while ignoring the reality of inflation is not fair. The 20k and 60k contribution figures really were the equivalent of 57321 and 98005 invested at the end of the compounding period. This significantly changes the ratio of the amounts invested.

    If you bump up the inflation figure to 6.3% (and actually include it in the example) then the early investor relying on compound interest has, in real terms, contributed more. Inflation rates like this are not unknown.

    Correspondingly, returns need to be above 6.3% for our “quit and compounder” to have a bigger pot at the end than our “late starter”.

    I’m in favour of saving as much as you can whenever you can. Relying on compounding or postponing saving are both non-optimal.

  • 24 JDR February 2, 2016, 3:44 pm

    Compound interest… money for nothing eh ?

    Let’s see for this couple living in CH :
    Health insurance premium now ( per couple ) : 5000 £ / year
    Avarage rate of increase since introduction of mandatory insurance in the mid 90’s : 4.7%

    –> Healt insurance premium when we are 85 ( one can hope….)

    31731 £ / year. Ouch.

    The loot which will enable me to escape the ratrace this year was not formed by compound interest, but by being DINKs in a high-salary, moderate income tax country, aided by luck in buying a house at the exact right time, and not inflating lifestyle along the way.

    Count me in on the Ermine’s side of the argument.

    Compound interest is a simple mathematical concept, it is the assumptions behind it that make/break the argument.

  • 25 LegalBeagle February 2, 2016, 3:47 pm

    I like to think of myself as a reasonably intelligent chap but have been struggling a little with the concept of compound interest when it comes to index funds. I’m hoping someone can shed some light and explain what I am missing!?

    Index funds track the stock market. So if the FTSE goes up, the value of my fund goes up. But at the end of the year, this isn’t crystallised in any sense. The value of the stock market continues to rise and fall. It is not like a bank account where interest is actually paid to you and added to your account balance, to be compounded when calculating the interest the following year.

    If the stock market falls the following year, the value of your fund is not better off, regardless of how long you have held it. Just because you have been holding the fund for 10 years, doesn’t mean that the stock market won’t drop below your original value.

    I understand that for accumulation funds dividends are reinvested which is analogous with compound interest but yields on index funds are nowhere near 8%.

    Can someone please enlighten me!?

  • 26 Scot February 2, 2016, 4:13 pm

    LegalBeagle, most of your understanding is correct. However, on your question re 8% – this is the long-term average return for stocks. As The Accumulator stated above: “…I deliberately chose the 8% figure, as The Investor has alluded to, because it amounts to the real historical return of UK equities plus 3% long-run inflation.”

    Some years it might go up 15%, and the next year might drop 20%, but in the long run the nominal average annual return is 8%.

  • 27 The Rhino February 2, 2016, 4:41 pm


    We all have an expected APR from the markets we invest in, if we’re rational we have to believe thats going to be positive and in excess of inflation (otherwise we would do something other than invest in those markets)

    really the ‘compounding effect’ that we are all so excited about just falls out of the maths, in as much as the time variable, t, say in no. of years is an exponent and not a linear multiple. e.g.

    future value = principal x (1 + expected APR)^t

    in other words, the future value varies exponentially w.r.t time, rather than linearly

    This equation is true of index funds, bank accounts, anything where we expect a % change over a period of time.

    The ‘crystallisation’ bit is a red-herring. All thats important is that you are interested in a future value associated with a principal, a % growth rate and a time period – that will amount to compound interest..

  • 28 Brendan February 2, 2016, 4:46 pm

    Compound interest is powerful at high interest rates. But vanishes quickly at small ones.

    But the doubling time (how long it takes to double your money) is a good way to see when it becomes relevant. (This is a bit like estimating when the linear approximation of interest breaks down.)

    At 8%, the doubling time is a a mere 9 years. At 3%, the doubling time is 23 years. That’s a big difference, and it’s quite possible those days of 9% interest are long behind us. In such situations, I’d agree with ermine: living far below your income is going to be the only way to amass a retirement fund. Interest is simply irrelevant over timescales shorter than 20 years.

  • 29 Brendan February 2, 2016, 4:53 pm

    And just so The Investor doesn’t chew me out – in a world of low returns, this only makes the case to invest earlier even stronger. You need whatever interest returns you can get, and the only way to get them is to start way earlier and way more aggressively than in the past. But let’s not kid ourselves: that won’t be enough, and compound interest will be even worse at helping us in our later years than it was before.

  • 30 The Rhino February 2, 2016, 4:58 pm

    @ Brendan – yes , what the exponent, t, giveth, a measly APR will taketh away. There are very concrete limits on the upper bounds of t.

  • 31 The Rhino February 2, 2016, 5:05 pm

    In an attempt to reconcile prior and further debate could I propose the Rhino law of compound interest:

    If 72 / APR > 20 years then you can safely drop the ‘miracle’ from the ‘miracle of compound interest.

  • 32 Naeclue February 2, 2016, 5:24 pm

    One other aspect of compound interest that is well worth considering is that it also applies to money you have spent. To use the figures in the article compounding at 10%, £1 spent now is equivalent to £19.19 in 30 years time that you do not have because you spent the £1.

  • 33 John from UK Value Investor February 2, 2016, 5:43 pm

    @LegalBeagle There are two levels of compounding in the stock market.

    1) Corporate compounding, where companies reinvest some of their profits into new factories and other productive assets. This increases their asset base which allows them to generate greater profits. Since the stock market tracks profits over time, growing profits = growing stock market value (with some ups and downs, of course).

    2) Dividend compounding, where some profits are paid out as dividends and then you, the investor, reinvests those dividends back into the same companies or markets, which is just like compound interest.

    The rate of return you’ll get (over the long-term) goes something like this:

    Let’s say companies produce a return of 8% on their asset (so a £100m factory would produce profits of £80m). If they retain half of that to build a new factory then those retained earnings will increase the asset base by 4% (half of 8%) and that will cause profits and dividends to grow by 4%.

    The half of profits which are paid out as a dividend are then reinvested by you. If the dividend yield is 4% then you will increase your invested funds by 4% by reinvesting.

    So you have 4% growth from corporate reinvestment of profits and 4% from your reinvestment of dividends, which gives a total gain per year, over the long-term, of 8%.

    Of course in reality the numbers are slightly different, but only slightly.

    And then you have to accept that the market price is very volatile, even if the assets, profits and dividends of the underlying companies in aggregate are not. But given enough time the market will inevitably go up as long as assets/revenues/profits/dividends are going up.

  • 34 Naeclue February 2, 2016, 6:03 pm

    I disagree that compound interest does not matter over short periods. As an example, consider someone who only manages to save for the 10 years prior to retirement. Saving the same amount each year, with annual interest of 8%. After those 10 years, compound interest would deliver an additional 6.5% above simple interest. To a lot of people, an additional 6.5% in retirement is significant and well worth having. Enough for some people to take an extra holiday each year.

    Alternatively, depending on circumstances, the additional return from the compound interest might allow someone to retire several months earlier than they could if they just received simple interest.

    Push the savings out to 15 years and compound interest would deliver an extra 16% over simple interest. Who would not want that?

  • 35 Kraggash February 2, 2016, 7:19 pm

    Would you also cover the effect of negative interest rates on your calculation…..e.g. Japan etc?


  • 36 amber tree February 2, 2016, 7:41 pm

    There are a lot of interesting comments of the details of the math behind compound interest.
    For me, the bigger picture still stands… Invest sooner, not later…
    As time travel does not exists yet, I hope at least to bring that knowledge over to my kids and nephews. Maybe then, they can retire soon and life a live by design. Let’s hope the article is still online in a few years…

  • 37 Learner February 2, 2016, 7:43 pm

    Heaven help the person born in 2016 who would live to 3016. What’s the SWR for a 950 year retirement?

    Starting (saving/investing/limiting spending) early is critical, particularly if this salary trend continues:

    But saving specifically is a tough sell given the last 10 years, where the lesson would seem to be “cash savings are worthless – buy a house, preferably two”.

  • 38 The Accumulator February 2, 2016, 7:49 pm

    Can you rely on compound interest to save your bacon? No.

    Is it better to start investing earlier? Yes.

    Is compound interest an important incentive to encourage early-bird investing. Definitely.

    If I’d started 10-years earlier then I’d have less to do now. Interest would be doing more of the work. Not all of it, but more of it.

    Sometimes the example needs to be at the top end of expectation in order to make the point. Otherwise, it’s too easily missed.

  • 39 Richard February 2, 2016, 9:20 pm

    Dont’t save. Buy the biggest most expensive house you can. Any spare cash? Either upgrade your house or buy something to rent out. Keep doing this. Property seems to be the only winner, backed by HMG! Safer than ns & I.

  • 40 Andrew February 3, 2016, 9:46 am

    I fall between the Accumulator and Ermine on this one. I’m one half of an early 30s couple who didn’t really get going on “careers” until mid twenties. Before that we weren’t earning much, travelling and working for charities and were spending most of it. Some years I was even spending more than I brought in. With the benefit of hindsight would I have put away more (or at least incurred less debt)? No, not really. I loved those years and wouldn’t want to change them for the world.

    Does that mean I agree with Ermine? Not entirely, once we hit the rat race around 25 we kept a pretty similar lifestyle (house sharing into our 30s) and watched as a few years of promotions and qualifications allowed us to put away more and more.

    Now we’ve had a kid (12 weeks and counting!) I think the saving will ease off for a few years (I’m taking 6 months off work to look after her this year) but I’m fine with that because like Captain Sensible above I’ll be benefiting from compound interest.

    In short, for the very little that it’s worth, my advice for today’s 20 somethings would be to follow Ermine’s path for the first few years only. Where I think Ermine is unusual is in not having kids. For him that allowed hard core saving later on. If you plan to have kids this might be much harder so take advantage of the few years between starting to earn a bit more in mid-late 20s and popping sprogs in early 30s to really build up a buffer and follow the Accumulator from then on.

  • 41 Neverland February 3, 2016, 10:30 am

    Would somebody please tell me what this investment is that magically goes up 8% every year like a metronome for decades?

    I’ve been such a mug investing in the stock market that richocets up and down 25% every year…

  • 42 The Rhino February 3, 2016, 11:53 am

    @Neverland a metronome swings back and forth not up and up, you picked a good metaphor but for the wrong paragraph.

    what are your annual % returns and how many years have you been at it? We could work out an average to help you see where you are?

  • 43 The Investor February 3, 2016, 11:57 am

    @The Rhino — Nice offer, but I am fast reaching the conclusion that Neverland is a troll, from his persistent postings along these lines. He absolutely understands annualized returns, and his comments will just confuse less experienced readers.

    @Neverland — As you know, we’ve been having run-ins for weeks now. You’re really getting very close to the sort of Telegraph commentator that I can’t stand. As such I may start deleting all your comments regardless of merit, because I can’t be bothered to police them. Not saying this is some incredible sanction etc, I’m sure you’ll live. Just fair warning to save you the typing. p.s. Don’t bother replying to this because I will delete for sure.

  • 44 The Rhino February 3, 2016, 12:13 pm

    @Richard – I think some % of residential property is crucial in your portfolio as the last two decades goes to prove. Its an asset class you can’t afford to ignore.

    The problem being its almost impossible not to be balls-deep 100% all in due to the enormous cost of entry, so you then have no diversity, which is also bad. To be able to do anything sensible you need enormous capital reserves to start off with – that sucks.

    You could buy REITs, but does anyone really believe a REIT is a suitable substitution for owning some bricks and mortar? I’m not sure I do. The tracking errors between them and a 2 up 2 down on your street will inevitably be huge

  • 45 JohnG February 3, 2016, 1:28 pm

    @TheInvestor I agree completely with the message you want to get across, but I find it disappointing that you’re resorting to unrealistic figures in order to sex it up. Yes it might get a few more people listening initially, but when they go out looking for an ISA that is going to give them 8% real terms growth and find out that this is hugely unrealistic this could well backfire.

    Also, although I know I’m making a non-dissimilar point to Neverland’s previous, I agree completely with your position. Seeing his incessantly make snide or inane comments isn’t adding anything for your readers. I’ve always been impressed by how you engage with people who disagree, but it’s only fair that they be expected to do so politely.

  • 46 JohnG February 3, 2016, 1:34 pm

    @The Rhino: I think that’s a very well considered position on property. I can see why some people view “go all in on property” as a valid strategy given the excellent returns over an extended period, but it seems like a small risk with considerable downsides to me.

    Obviously, as you highlight, an initial property investment is likely to be almost 100% of your investment (for people who aren’t already financially established) but I think diversifying after this is safe and lower risk strategy.

  • 47 Planting Acorns February 3, 2016, 1:55 pm

    @Andrew… Congratulations! Maybe have a look at these baby sips some of the true believers in compounding on here believe in? I for one would love to know what £25/month looks like on his/her 30th bday ;0)

    As for the figures could anyone indulge me with commenting on my back of the envelope return figures…

    We say:
    stocks ‘should’ return 8pc over long term
    Inflation is c.3pc
    So real return is 5pc…I’d say you need to factor in costs (@0.5pc) into that, taking you down to 4.5pc, AND then the effect of lifestyling .

    If bonds return c. Inflation and you move from, say, 85pc shares at beginning of investing to 35pc at point of retirement…

    The 4.5pc figure should be closer to 3pc???

    That said…I’ve found this site as I am a saver…and totally agree with TA that BOTH saving hard and saving early make a difference.

  • 48 The Rhino February 3, 2016, 1:58 pm

    @JohnG – and its worse than 100%, its 100%, i.e. all your capital *plus* leveraged up to the eyeballs with mortgage debt.

    So although the massive gearing can go very right, on the flip-side it can go very wrong. Its definitely not sensible.

    I think anyone slightly younger than me doesn’t truly believe housing assets can perform badly – they haven’t experienced it with skin in the game.

    I think the least worst option is to buy the cheapest property you can bear at the earliest opportunity in your life. Then spend the rest of your effort diversifying away from that initial position. Its miserable I know, but least worst..

    Thats if you want to do the normal stuff, i.e. get married, have kids etc.

    If you don’t want that jazz then you can be more inventive, just read ERE for a few weeks and you’ll get the gist

  • 49 JW February 3, 2016, 2:06 pm

    On property, I have always taken the view that just by owning the house we live in (eventually- still paying off the mortgage) I have a substantial investment in residential property, and what is more I am indirectly invested in more as between us my OH and I are likely to inherit a share in several other houses (all paid for). So any spare cash I have is invested in other things, so ensuring that my asset base as a whole is diversified. Of course the growth in value in property has been much greater than in other assets, but I’d worry about being overly invested in one asset class particularly because that asset class is relatively illiquid: you can always sell some shares at a loss quickly if you need cash, but selling a house, even at a loss, can take time.

  • 50 The Rhino February 3, 2016, 2:07 pm

    @Planting Acorns – its 19k

  • 51 JW February 3, 2016, 2:12 pm

    @ the Rhino “anyone slightly younger than me doesn’t truly believe housing assets can perform badly ” nails it. I personally escaped having skin in that game (just) but bought my first flat from sellers in negative equity at a substantial discount to what they had paid a few years earlier, and watched friends suffer. Part of me still thinks the bubble will burst sometime

  • 52 The Rhino February 3, 2016, 2:19 pm

    but bear in mind if you had put it in a sipp for tarquin jnr he wouldn’t be able to access it for a further ~30years after that midway valuation

    can you salary sacrifice into your childs sipp? I’m guessing probably not. Therefore a junior sipp doesn’t really make any sense, certainly not if your a HRT. The kid would only get 20% back on the 1st ~2800 per year.

    Much better off putting it in your own SIPP/ISA then gifting it down the line when your still young enough to prob live a further 7 years. That way you keep your options open in case the lay of the land changes, i.e. detrimental government tinkering or your kids turn out to be a$$holes

  • 53 The Investor February 3, 2016, 3:07 pm

    I must admit to ongoing bemusement that compound interest is even debated as being an undeniably good thing or not. 🙂

    Fine, I understand not everyone is in the position to save a lot when they’re young, and to keep up that saving when other responsibilities strike — although obviously I think most people are more in that position than their spending habits would imply — but the reality is continual saving, investing, and reinvesting has always been the surest route to the average person improving their wealth. Books like the Millionaire Next Door were an eye opener to me in this regard, many years ago.

    As ever I am reluctant to talk personally in too much detail, but while this debate rages on and the markets slump 10-50% over the past year, my own net worth (which is all currently equities, some exotic pseudo-fixed interest, and cash) has multiplied about seven-fold over the past 12 or so years since I got passionate about investing, from an already fairly decent cash savings base. My average earnings over the period were not vast, and massively lumpy due to starting and then exiting at about breakeven a business, and then half living off savings more or less for a year or so afterwards. I’ve only ever paid a smidgeon of higher-rate tax all-in, so that gives you an indication that I’m not a mega-earner. And I only got serious about my SIPP in the past 2-3 years.

    If I had saved every single penny I earned, GROSS, for the past 12 years, I still wouldn’t have the savings pot I have now — and obviously I didn’t, I lived in London over that period, a place not renowned for its cost of living benefits.

    Barring Black Swans, if I never save another penny I project I’ll be a millionaire pensioner. If I keep saving I’ll be minted:


    Compound interest is already my ally and friend, and I expect it to remain so.

    The discussion is interesting in charting out the contours of what’s realistic and what isn’t, but I’d strongly urge any casual readers not to get too drawn into it if it means they start to doubt the benefits of saving regularly from a young age. You will almost certainly have a better result and life from it.

    My snowball is a decent size relative to my income, and its rolling and growing and rolling. I’m in my early 40s.

    The comments by @Andrew are sensible. Of course nobody (or at least not me) is saying that a young person should avoid particularly brilliant travel or other opportunities that require spending. But of all the young people I know, the “brilliant opportunities” spending is dwarfed by the “routine Med holidays to get blotted or weekly £100 evening out sessions or another new jacket” spending (and of course the savagely high cost of living/housing for most, and student loan repayments, and so on and depressingly on).

    For other views on investing and compound interest from me, please see my earlier comments to ermine. 🙂

    Finally, on property, one under-appreciated reason many people have done so well with property, aside from the cheap leverage, is that house prices have compounded for basically two decades, and they’ve regularly ‘saved’ to repay their debt.

    See this article for more:


    Short version: If people invested the way they bought houses, they’d generally do a lot better.

  • 54 The Rhino February 3, 2016, 3:30 pm

    Another positive thing about compound interest is that it gets exponentially smaller over time if your growth is negative. Thats a nice asymmetry. Losses compound to smaller losses and so on if your going through a bad patch.

  • 55 deadpiratelol February 3, 2016, 6:11 pm

    I love your Blog which introduced me to John Boggle, Tim Hale and David Swensen and I have read books from all three to really understand the game.
    Compound interest is fascinating indeed.. So I am the unlucky Captain Blithe, 33 years old and still getting started. I am one of those immigrants that everyone keeps complaining about.. 😀 So really, I couldn’t afford to save anything until I turned 28 years mainly because I was studying, supporting my old parents who I bet have never heard about pensions… haha However, in last 5 years I had consistently made enough money to be able to save 2000 GBP’s per month or more while living comfortably and still supporting my family. Guess what did I do with the extra money? Solve problems of my siblings/help them get mortgage..build houses.. etc and lots of waste on designer clothing and travelling and a big wedding. I didn’t invest in last 5 years and that is the lost time I can’t make up for in anyway. Luckily I have increased my income in all these years and am still able to save 2000 GBP’s a month after paying all my expenses. I now have a choice to invest this 2000 GBP’s a month either in the index funds or save it for the down-payment of the house. I already have 20000 GBPs saved for house deposit. Looking at the London house prices, there is a sharp increase in prices e.g. apartment I live in was bought by my landlord in December 2014 for 235,000 and similar apartment in my building just sold for 350,000 GBP’s last month. In this situation, would it be wise to invest in the stock market aggressively (2000 GBP’s a month) or save it for the house. Appreciate all the advice.

  • 56 Planting Acorns February 3, 2016, 7:10 pm

    @Rhino – where’s the 19k figure come from?

  • 57 The Weasel February 3, 2016, 7:53 pm

    Speaking of property not sure HMG is too supportive of it anymore given the latest tax changes. Heck even the torygraph is whining about it. I’m hearing again ridiculous stories about buyers offering something like 85K above asking price in the commuter belt. The last stage of the bubble? Who knows!

  • 58 Planting Acorns February 3, 2016, 7:59 pm

    @Weasel …tax changes only adverse on second properties… The govt. recently made the taxation of own homes even more attractive with it’s complicated set of IHT changes…

    …As you would have to pay rent in the alternative, owning your own home seems to make sense in any circumstances (as long as you’re not forced to sell)

    @Millie…nothing encourages hard saving like living somewhere cheap…this is purely anecdotal but I don’t think people fly the nest at 26/27…either they do it young or in their 40’s…

  • 59 The Rhino February 3, 2016, 8:18 pm

    @PA from the monevator compound interest calculator of course. After 30 years you would have 15-19k. After 60 you would have 50-90k. Based on your savings rate and range of expected returns.

  • 60 Planting Acorns February 3, 2016, 8:34 pm

    Ah @Rhino that’s 19k in ‘today’s’ money…ie
    8pc – inflation – costs…but I was ‘obviously’ thinking of increasing the contributions in line with RPI as well ;0)

    But you mention some great points that The Man might suddenly decide to take it to hand out in benefits. The ‘ever decreasing’ lifetime allowance puts me off adding a DC pension to my DB one.

  • 61 Richard February 3, 2016, 8:40 pm

    @the weasel

    That is buy to let, agree they have it in their sights.

    Primary residence on the other hand get hands out left right and centre (help to buy- which also artificially increases prices people will pay), tax relief (no capital gains on sale even if down sizing) and is significantly protected from IHT (isn’t it now £1m on primary). Plus leverage and if inflation gets going again, you watch that debt dwindle as the value sky rockets.

    So fill your boots with as much primary residence as you can afford!

  • 62 The Rhino February 3, 2016, 8:53 pm

    @PA – but did we subtract 3% to give a nominal (inflation adjusted) return? Yes we did! Happy days

  • 63 Planting Acorns February 3, 2016, 8:55 pm

    @Richard @anyone considering how much to borrow to buy a home

    …he might be right but when he says ‘…can afford’ bear in mind you need to be able to afford it when interest rates rise

  • 64 The Rhino February 3, 2016, 9:00 pm

    Sorry scratch that. Misread your post. You’re right that the savings rate didn’t increase with inflation. Which prob would be the case in a real world scenario

  • 65 Planting Acorns February 3, 2016, 9:04 pm

    @Rhino… But I meant £25 now and the equivalent of £25 next year (£25.75) etc…increasing contributions in line with inflation is crucial in any savings…

    …I think Ermine raised a very good point…not only does £1 now buy more than £1 in the future, but because you earn more even adjusting for prices over time its hard to value a £ now. I remember my friends 21st birthday, when after a long boozy night we shared a can of Carlsberg export in a night club before getting the bus home…for his 30th we went to Rome… Why should the 21 year old me sub out the much richer 65 year old me?

    I guess I’d rather have money to spunk in 30 years time and think I could have saved a bit less than sit over a one bar electric heater wishing I’d done more…

  • 66 Richard February 3, 2016, 9:09 pm

    I am being somewhat facetious, I do believe in a diversified portfolio.

    But my parents were of the ‘buy as much as you can’. That was due to them experiencing high inflation – large debt payments shrunk away as wages jumped up. So hard for a few years and then easy with massive house to live in. Now it is more about the capital gain and the hand outs and the tax benefits (esp as pensions are slowly losing their tax draw)

  • 67 Planting Acorns February 3, 2016, 9:40 pm

    @Richard … Agreed.

    My cousin is doing ‘London Help to Buy’…it is simply astonishing

  • 68 Learner February 3, 2016, 11:21 pm

    @deadpiratelol, it depends on your time horizon.. if you expect to need that money for a house deposit in less than 5 years then the sharemarket is a risky place to put it (particularly with current uncertainty). Better to put it somewhere with a lower fixed return but little risk, if any. I’m in a similar situation – have cash savings and can’t risk it in the market. I appreciate that prices are rising much faster than savings, but remember you only need a portion of that increase to cover the deposit. eg if you’re aiming for a 20% deposit and the price rises by £20k next year, but in that time you’ve saved another £10k then you’d be in a better position.

  • 69 ermine February 4, 2016, 1:35 am

    Seriously FFS. 10%. Dude, if I could return 10% p.a. I’d be laughing too. Compounding works. But you, personally, don’t get enough return and/or you don’t live long enough.

    I hope that my estate will do well. I will instruct them to do n’owt for the first 100 years after my demise. After that, assuming the financial system survives, they will be able to boil oceans. Assuming, that is, oceans still exist to be boiled.

    There’s no doubt compounding works. The tragedy is that it’s low rent. Your challenge is to live 200 years while spending bugger all for the first 100 🙂

  • 70 ermine February 4, 2016, 1:55 am

    @deadpiratelol It’s just my experience, but I was dumb enough to buy a house in 1989. The scars on my personal finances still show. I am debt-free, I retired early, but compared to my peers I live in a shitty semi (100% owned) as opposed to their fancy McMansions (50% equity, tops).

    You, sir, are on the cusp of that choice. You have a hand of cards. Play those suckers well. You pays your money, you takes your choice.

    I got up today, and asked myself how to go about bird surveying. My ex-colleagues got up today. To go to work…

    Where did I go right? I overpaid, but paid down. Where did I go wrong? I boarded fewer jet aircraft, and those that I did, were paid for by work.

    I should have rented. Buying that house was the single biggest financial mistake of my entire life. Chasing momentum in the dotcom bust was a mere trifle.

    You can’t go wrong with housing, in the British mind. But who is retired early 😉 The buggers still ain’t making any more time on your three-score-years and ten… Beware the Kool-Aid. Property goes up and up for ever. Like all other assets. Until it goes down. BTDT

  • 71 Learner February 4, 2016, 4:28 am

    @ermine – Wait, so we can’t time the equity market but we can time the property market? It would be more useful to say buyers should go in with their eyes wide open and be prepared to stay put for 10 years or more should the worst happen. I suspect some people are now taking that view. If I could hypothetically buy a house now that would be worth no more than I paid for it after 10 years.. well that’s starting to look like not a bad deal, when rent is going up 5% every year (compounding!).

    Reluctant as I am to carry on the property theme, with interest rates barely reaching the rate of inflation (ie negative in real terms) and the GFC’s half-arsed recovery already teetering, it’s extremely difficult to ignore it. Sorry TA/TI.

  • 72 The Weasel February 4, 2016, 10:05 am

    So what I gather from the ermine is it comes down to interest rate then, as opposed to save vs no save. And also the hopelessness in the future of capitalism. I have myself wondered whether the last 100 hundred years are *any* indication of the next 100 (axiomatic to any financial forecasting), but then again I can’t get myself to spend all my money on booze and hookers… The parties I’d be having, I tell you!!

  • 73 Fremantle February 4, 2016, 10:30 am

    I don’t understand the angst about compounding, either the over enthusiastic support for it, or the realists objection to highlighting the benefits of compounding. Compounding is one of the arguments in favour of long term investing and reinvesting of dividends. It gives a real and quantifiable boost to your investment returns, but as importantly, provides a defence against inflation. It even helps smooth out volatility over the long term through pound cost averaging for reinvested income.

    Compounding is simply a fact of life for buy hold long term investing.

  • 74 The Investor February 4, 2016, 10:40 am

    @The Weasel @Ermine — I don’t know what more to say. I’m in my early 40s and I estimate I have roughly twice the six-figure sum I’d have without compound interest. Obviously (because I believe in compound interest) I expect it to snowball massively by 60, Inshallah.

    Admittedly I’m an active investor who has seen better/lucky results, but I’m not Warren Buffett. And these have hardly been bull market conditions.

    Ermine, I’m sorry you didn’t save when you were young. Your anecdote isn’t fact. Poor returns from the stock market for a decade or two doesn’t mean historical returns — and the logic behind those returns — gets thrown into the dustbin, it means it was one or two of those decades.

    Also, all this wayward thinking when it comes to interest rates and inflation.

    You can’t say “hey, I’ll need a fortune in my retirement due to inflation because Monster Munch used to cost 2p when I were a lad and now they cost 50p” in the same breath as “Interest rates are near-zero so there’s no return from compound interest”.

    If interest rates stay near-zero for 20 years, Monster Munch will probably still cost about the same in 20 years. True, in a deflationary world compound interest isn’t going to help you, but that’s very different from arguing it wasn’t a massive leg-up for the past 100 years.

    I’m happy with *us* having the debate, even if some of us are wrong IMHO. 🙂 My concern is that somebody fairly young Googles compound interest, comes to this page, reads certain of these comments, and so she doesn’t save until she’s 50.

    What an absolute car-crash of a mistake from terrible advice that would be.

    If the argument is “save more than you think rather than relying on potentially over-sexed return rates” then fine, we’re all a little wiser.

    But enough of this: “But you, personally, don’t get enough return and/or you don’t live long enough.”

    That is just not true, unless you take the advice of some and don’t start saving until you’ve only 20 years left on the clock.

  • 75 Topman February 4, 2016, 1:19 pm


    FWIW and having started my adult life with nothing and never having inherited anything, I bought my first house, a modern semi-detached, with a mortgage in 1973 for £10,100 – I literally didn’t have that last £100 so I went into a high street bookmakers, put the contents of my wallet, £10, on a four horse win accumulator at Kempton (although knowing next to nothing about racing) and came out with £100+.

    My current large detached house, in the beautiful south west, is conservatively worth £550,000, and I have the c.£100,000 proceeds from the sale of my business (8 years of 24/7 365 b*lls aching hard work) safely and sensibly invested.

    I “saved” assiduously via the repayments on the various mortgages along the way, and by virtue of forsaking a good salary for the “joys” of starting and running a business which earned me no more than a paltry income but which had an attractive goodwill value when I sold it and retired.

    So by virtue of my “saving”, my £10,100 became £650,000, compared with the £11.90 2016 value of £1 in 1973 per (http://inflation.stephenmorley.org/).

    Hit my estate with heavier IHT or whatever? No thank you!!!!!

  • 76 Luke February 4, 2016, 11:13 pm

    “When you’re young, time is on your side. Make the most of the once-in-a-lifetime opportunity by sticking some money away”

    As a 23 year old I’ve been following this advice since discovering Monevator back in 2012, even if you think young people don’t read your site. Just remember at least one does :).

    Thanks to The Investor and The Accumulator for the great posts !!

  • 77 The Investor February 5, 2016, 11:45 am

    @Luke — Great to hear. (Please report back on your results at 60! 🙂 )

  • 78 Survivor February 5, 2016, 4:11 pm

    Maybe those who reckon CI is over-rated are just thinking too narrowly……

    If your diversified investment portfolio is increasing by 10% a year, [like TEA, so not unproven] in an almost zero-inflation environment like we’ve had now for years, CI will give your survival fund a significant boost.

    Even if over your investment lifetime, CI only contributed a 3 – 5% total boost to your wealth, would anyone turn that down? Almost everyone unknowingly hands that over to their closet-tracker, pension-provider annually anyway ….. & they seem quite happy with that, so it can’t be so bad.

  • 79 The Rhino February 5, 2016, 8:20 pm

    @Survivor – TEAs track record is remarkable. I wonder how TI compares? I would be interested to know what % APR figure TI used for his CI forecast. Double digits?

  • 80 Ash February 6, 2016, 8:53 am

    Lots of talk on here about property, as one would expect. My view is this: Commercial property can yield 10%+ at the moment, with longer Leases. A property purchased with 10% yield has very limited downside on capital, yet spits cash out each month, which can be reinvested in liquid investments immediately (eg. stocks). Ignore all advice to leverage with minimal deposit and buy instead using only cash – you will sleep better at night. The only downside is you are not compounding the initial capital but instead have fixed income which can be used for other things, although the rent can be increased. Reinvesting share dividends is great but not if the principal investment drops 50%…

  • 81 Survivor February 6, 2016, 6:54 pm

    @ The Rhino – I don’t know about TI’s score for this year, but in my portfolio, I got 3 areas that lit up …..just into the double figures by the end of the year – shares, property & P2P. So I know it’s possible, it’s consistency that matters though, year on year …..& that I don’t have enough of a record to go on yet, so am unable to preach.

    If I had the guts to increase the percentages they make of the total, I would definitely do a lot better overall – you have to go with what your temperment can cope with however.

    Over at the Brave New Life blog, although it’s American, it’ll have relevance for the UK & that guy tracks his experiment with the 2 main P2P platforms over there. What he gets rings true for what I have seen for myself – I have slowly worked P2P into my investments for nearly 3 years now, but am still cautious about how that’ll cope with a downturn in the real economy ….. so far it doesn’t seem affected by the recent stockmarket gyrations, but a cyclical downturn should be different.

  • 82 IanH February 9, 2016, 5:27 pm

    I sometimes wonder if Accumulator just wants to rattle Ermine’s cage now an again and knows just how to raise him from his slumbers. ..

    Both ways of looking at compound interest have merit, and what seems to me to distinguish them is the time perspective. One can only save aggressively for so long, and eventually things will change; interest will compound ad infinitum if one leaves a fund alone – even your death will not prevent further accummulation, unlike earning and saving. But earning and saving knocks spots of interest compounding over short time scales and is the only way to build up a relatively large fund for late starters, or late higher earners (same thing maybe). I stopped saving into my SIPP about a year before I retired to save more cash. I’ve been retired about 6 months now – to see see the relative effect of saving and compounding over a human-scaled period of a few years check out this graph of my fund value over this period (hope the link works for people)


    As I hope is apparent, the slope of the accumulation line for me was mostly savings driven. The aim of a saver is to get the slope as steep as possible, and the corner in the graph as high up the axis as possible, before saving stops, for whatever reason. Interest compounding then extends to infinity to the right in a more or less random walk with hopefully a very slight underlying upward trend on the scale of decades (the effect of compounding) that will keep the fund above zero despite small, occasional withdrawings.

  • 83 Stan February 9, 2016, 6:13 pm

    I saw a couple of young people posting here and thought I’d answer in with my experiences as well. Just as a quick background I’m American and 27. I started saving with my first job at 14.

    I find that young people fall into one of two camps either saving nothing or saving massive amounts. I’d say it’s about 3 to 1 in favor or saving nothing. In the office where I work however I’m saving an impossible (for Europeans with European tax rates) 78% of my pre-tax income and almost have a house paid off (I owe about $8,000 on a $142,000 house which from what it looks like here is also impossible in most of Western Europe – it’s also declined in value from when I bought it also seemingly an impossibility in Western Europe).

    My office mate and a few former roommates are almost the same way. I tend to believe it’s clustered by profession as most of my friends outside of what we do are part of the 75ish% majority saving nothing.

    I also believe savings rate tremendously trumps compound interest. It’s almost a double edged sword because the higher your savings rate the less money you have to make up (assuming an income based approach). Compound interest is great but you really need lots of seed money for it. When I started saving at 14 I didn’t make much money compared to now and it didn’t really do too much compounding in the last 13 years but since I started saving heavily after graduating university (in percentage my savings have been remarkably consistent) I’ve seen how wonderful it is. Even though mathematically 10% on one dollar is the same as 10% on $100,000 there’s a world of difference between $0.10 and $10,000.00

    I also disagree that it’s hard for young people to save. It’s quite simple really and you can still maintain a normal life. I manage to visit 2-4 new countries every year and not just cheap ones like Croatia but expensive ones like Norway or the UK as well. Then again I’m lucky because I enjoy low tax rates, no university debts, and a couple other advantages.

  • 84 Steven John Tait January 19, 2021, 2:47 am

    “You’ll be laughing later. (At me, as I snivel and regret my youthful folly).”

    Exactly how I feel now. I was 17 in 1999 when I got a stocks and shares ISA with Clydesdale bank. I put in my life savings: 1000 pounds. Next time I checked it I had lost 250 of that due to the correction. ‘Take it out!’ I told the bank. People are supposed to make money on the stock market, not lose it, I thought to myself.

    I waited until August 2017 to take the time to educate myself. I’d probably be retired by now if kept at it back then.

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