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The Power of Compounding

The Power of Compounding – with Pete Matthew

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

Last month we were very lucky indeed to have independent financial advisor Pete Matthew deliver a webinar workshop on all things Money, for PB. Pete, who is based down in Cornwall, has been a Chartered Financial Planner for 20 years and is managing director of Jackson’s Wealth Management, as well as being the founder of the UK’s No.1 personal finance podcast “Meaningful Money” which has been downloaded over 1.3 million times since it’s conception.

Part of Pete’s 2 hour webinar workshop “The Photographers Financial Guide to Life” focussed on the magic that compounding. To drive this point home, we thought it would be a good idea to do a blog post on just that!

I’ve had conversations about saving and investing with many photographers in the past, and I’m generally surprised by the lack of enthusiasm for the topic (i know, right!). I hear things like “what’s the point of earning like x% on your money, it’s only like £x per year, it’s best off just sitting in your account where it’s easy to get to when you need it”.

Now, if it wasn’t for compounding, I’d tend to agree with this viewpoint; on the surface, typical returns of ISA’s/investments can look puny. Enter compounding.

Now, Pete articulates this much better (so watch the attached extract from his webinar) but the long and short of compounding is the exponential growth of your invested money via the interest on your original capital earning its own interest – so the more interest you earn, the more interest your interests earns and so on.

Don’t believe it’s power?
Get yourself over to https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php (in fact, save it into your bookmarks!) and have a play. You’ll be AMAZED when you see the money making wizardry that occurs once your money has been compounding for 10+ years.

To wet your appetite, let’s say that after watching Pete’s webinar, you want to put away £500 every month for your future (go you!). You’ve decided on a stocks and shares ISA as your investment vehicle (did you know that the average stocks and shares ISA grew by an impressive 15.8% in the 2016/17 tax year!). Now “past results are not an indication of future performance” so let’s say that over the next 10 years, your ISA performs at an average of 10% interest per year – let the magic commence:

Photographers Business Investing

Wow. Having put away a very achievable £500 per month you’d be sat on £208,000!!! In year one, yes you’d earn a measly £315 in interest, but year on year the interest will grow exponentially! By year 15, still only contributing your £500 a month, you’d earn almost £20k in interest in that year alone, and have made a total of £118,000 in interest at that point, compared to the £100,000 you’d contributed with your £500 a month. Amazing!!

Don’t just take our word for it, check out Pete’s explanation of compound interest above. If you’re yet to purchase the full webinar workshop, head on over to our playbacks page to catch up and enlighten yourself with:

THE BASICS

  • Putting in place an easy budget
  • Clearing debt quickly
  • Good debt vs bad debt
  • Putting a buffer between you and the world to keep debt to a minimum

NEXT STEPS

  • Saving vs investing
  • Harnessing compounding
  • Automating as much as possible
  • The only two accounts you’ll need
  • Risk is good
  • Keeping an eye on things

ACCELERATE

  • Snowballing your wealth in small increments
  • Building a simple financial plan with free tools
  • Staying the course
  • How to have your business save for you

Header image by NeONBRAND

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