Why Compound Interest is so important for your Pension
Have you ever heard people talk about compound interest and wonder why they talk about it so much and why they love it if they savings and hate it if they have debt?
This article will tell you why you should it love it for your pension and why it is so important.
If you put £100 into an account and it receives 1% interest, the savings account will be worth £101 in a year.
If you put £100 into an account and it receives 5% interest, the savings account will be worth £105 in a year.
The difference in interest earned is £4.
In 20 years time, the account paying 1% interest will now be worth: £122.14
In 20 years time, the account paying 5% interest will be worth: £271.81
The difference in interest earned is £149.67. More than double what is in the 1% savings account.
This is why compound interest is so important for your pension.
Compound interest is simply the interest you earn on your interest. The more interest you earn and the longer the money is invested, the bigger the impact.
5 times bigger
If you are 30 now, it is quite possible you will not retire until you are 70, in forty years time, lets look at these calculations again:
In 20 years time, the account paying 1% interest will now be worth: £149.18
In 20 years time, the account paying 5% interest will be worth: £738.80
The difference in interest earned is £589.62. At this point, the account paying 5% is nearly 5 times bigger than the 1% account.
How can you reap the benefit of compound interest?
Compound interest is an amazing thing and is key to your pension success. What is more amazing as they don’t really need to consider it much. Instead you just need to do the following:
- Invest as early as possible into your pension. The earlier you do, the longer your money can work for you. Even if you think it is too late now, starting today is considerably better than starting in 10 years or never starting.
- Watch out for fees. You want to keep fees as low as possible. High fees eat into your profits and reduce how much you earn. Do not ignore them. This Telegraph article demonstrates the differences clearly.
Finally, remember KISS.