Compound interest calculator

Chapter 2: The magic of compound interest and how it works  
 
This video is for educational purposes only. This should not be viewed as advice or a recommendation to invest.

In the world of investing, compound interest is something that really excites people, and for good reason.

Some claim Einstein referred to it as the eighth wonder of the world, others have called it an investor's best friend, and many simply talk about the magic of compound interest.

So what is it and what is all this fuss about?

Put simply, compound interest is the ability to earn interest on interest on interest over the life of your investment.

Over a longer period of time, it has the potential to accelerate the growth of your savings.

So long as you get a similar interest rate over the years, you'll earn more and more interest, and all you need to do is arguably sit, watch and wait.

Let's take a theoretical example, just to show you the potential power of compound interest.

I've consciously kept the numbers simple to help explain the concept.

Your situation and your numbers will likely be different.

This example also assumes no withdrawals are being taken and the money is left to grow.

So, let's imagine I invested £1000 and it grew a steady 10% each year.

Now I know that 10% is quite generous, but it keeps the maths nice and simple.

For this example, after one year, my £1000 with its 10% growth is now worth £1100.

After two years, this £1100 with a further 10% of growth is now worth £1210.

I'm slowly making progress, but as the interest on the interest on the interest builds, it's remarkable how the value of my original £1000 builds too.

After five years with constant 10% interest, my £1000 is now worth about £1600.

After 10 years, about £2600.

After 20 years, amazingly, about £6700.

In this simple example, my £1000 has grown nearly seven times, after 20 years.

The snowball effect of compound interest starts to become clear.

And that's all without me having to add a single penny beyond my original £1000.

It proves that the sooner you start investing, the more you can gain.

Even a small start beats waiting to go big with compound interest, all I've had to do is sit, watch and wait.

But don't underplay the importance of sitting, watching, and waiting.

The power of compound interest does require you to sit.

And by that I mean don't be tempted to stand up and spend that interest.

It also requires you to watch.

In my example, I suggested a constant 10% rate of interest.

Now, the world of investing is rarely as constant and as simple as that.

If you watch your investments underperforming, you may want to stand up.

You may want to take some action and it also requires you to wait.

In my example, I showed you how the power of compound interest really kicked in after 10 and 20 years.

The magic of compound interest is real, but it takes time to come to the boil, so be patient. 

Want to see the magic in action? Aviva has a simple compound interest calculator and you can try it for yourself.

Just enter the amount and see how it could grow after 5 or 10 years.

There's a link in the video description.

This video is for educational purposes only. This should not be viewed as advice or recommendation to invest. Investing offers the potential for better returns than cash savings over the long term (5+ years). But there are risks — the value of your investments may go down as well as up, and you may get back less than invested. 
If you want advice on investment choices, then we’d recommend speaking to a financial adviser. There may be a charge for advice.