“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein
A charge of one per cent a year or better still 0.5% a year doesn’t sound like much, but due to the power of compound interest it can quickly grow to a large amount over a number of years. Compound interest is hugely important for investment growth as the following quote reveals.
Ask Warren Buffett for the single most powerful factor behind his investing success, and he’d respond “compound interest” — without skipping a beat.
He’s been preaching this for six decades, and it’s made him the richest man in the world.
Compound Interest and your investments
But, just as compound interest can have a dramatically positive effect on investment success it can have an equally dramatic negative effect when even charges as low as 0.5% – 1.0% are taken from your investment.
Because charges taken out of your investments or pension fund has the opposite effect to compounding slowing down any growth your investments are achieving year after year.
So make sure you understand the power of compound interest and make sure you don’t end up paying for it.