“My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
Warren E. Buffett
Warren knows a thing or two about investment, so when he tells you the secret to his success, it might be worth taking a closer look.
Now, we can’t help you with ‘living in America’, nor with ‘lucky genes’ but we can help explain how ‘compound interest’ works. To start, it’s worth playing around with the controls for the chart below to get an intuitive feeling for ‘compound interest’. The bars in black show the amount saved in pounds sterling (£) if no interest is considered and if a specific amount is saved each year. For example, if £1000 is saved each year then at the end of 40 years, £40,000 will have accumulated. The green bars, on the other hand, show the amount that would be saved if interest is considered. The interest received on interest accelerates as the years pass. Have a play around with the interactive controls and we’ll explain more below.
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