The Most Powerful Force in the Universe – Compound Interest
Posted by Alan Fagan on 19th October 2018
It’s often claimed that Albert Einstein thought compound interest to be ‘the most powerful force in the universe’. Now, whether or not he actually said that is a matter of some debate. Whoever came up with the statement, however, wasn’t far off the mark.
Compounding your returns is a very powerful way to grow an investment.
Whether you’re planning for your retirement, saving to buy a house, or putting something aside for your children’s future, compound interest can be a powerful force in helping you achieve your financial goals.
By rolling returns back into your investment, you multiply the impact and by adding regularly to the pot, even with small amounts, you might be surprised at how quickly your investment can grow.
Let’s look at a Linked Finance example.
Assume you have an initial amount of €10,000 to get your Linked Finance account up and running.
The average interest rate available on Linked Finance is about 10.5%. Let’s take off the Linked Finance service fee and factor in a very pessimistic discount for defaults and bad debts. Even still, a net pre-tax return of 7.5% is very achievable.
At its core, here’s how compound interest works.
As you can see, the amount of interest you get each year increases because you’re effectively, earning interest on your interest.
The compounding effect has a really powerful impact over longer terms. After 10 years at 7.5%, your initial €10,000 has become €20,610.32. After 20 years it’s €42,478.51.
And that’s just with simple annual compounding and no additional investment.
With Linked Finance, if you topped up your initial €10,000 with just €50 per month, after 20 years you’d have €72,294.71.
That’s €50,294.71 in interest earned on total contributions of €22,000 over the period.
The tools you need for long-term growth.
At Linked Finance, we provide lenders with the tools needed to support this type of long-term investment.
Autobid – You can create an Autobid mix to suit your appetite for risk. This will allow you to ‘set it and forget it’. Your funds will be automatically redeployed as repayments are received, allowing you to easily unlock the power of compound interest.
Standing Order – You can also easily top-up your initial investment, with regular contributions via standing order. You can find full instructions for how to set this up in your Linked Finance account.
Now the figures here do not account for tax and you should seek independent advice on personal tax obligations arising from P2P lending. We have, however, been quite conservative with our estimated annual return of 7.5%.
The table below shows what the same initial investment of €10,000 and regular contributions of €50 per month would yield after 20 years at different rates of annual return.