INFOFRIDAY – The power of compounding

We recently stumbled upon this great quote from Albert Einstein: "Compound interest is the 8th wonder of the world, if you understand it, you earn it....if you don't... you pay it", and we thought it would be a good idea to dedicate this week's infofriday to it !

We have assumed a 5% interest growth as this seems to be the best rates we could find in Junior Isas and Children's saving accounts.

As with every infographich, we should never forget the great simplification that happens every time we move from a complex reality to a two dimensional board (the map is never the territory, said the great Gregory Bateson, one of the founding minds of cybernetics !!!)... so whilst compounding is a great concept and investing as early as possible is the ultimate road to the best asset growth, there are many considerations that we ought to include in our financial plans.

The opportunity cost of capital is one. What you could have done with your money, should you have not invest them in  a certain strategy.  Buying a property, for instance, and paying a mortgage instead of investing in securities would probably generate a much greater amount of wealth in those 25 years we have considered. 

The calculation also assumes that the purchasing power of your money stays the same over the 25 years horizon. This is obviously not true as £100 25 years ago would have bought us many more things than they do today. 

Compounding remains, however, a powerful tool not to underestimate when planning our children's financial well being. 

 
 

 

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