Making interest more interesting

It has been claimed that Albert Einstein once said that compound interest is the eighth wonder of the world. Putting aside the question of whether Einstein really did say this, compound interest is certainly a phenomenon that anybody looking to grow their money should be aware of.

This is the process of making your money make money by reinvesting interest earned. This boosts growth and builds wealth faster. By reinvesting interest, your returns are also put to work and generate their own returns – the interest is compounded.

The table below shows the difference that reinvesting interest earned can make over a period of 20 years, compared to withdrawing the interest and leaving the capital invested.  In this example, £1000 of capital is invested and a consistent interest rate of 5.0% applies each year (money is also reinvested at 5.0%).

If interest is not reinvested, the £1000 capital investment returns £50 each year, giving a total of £500 interest earned over 10 years and £1000 over 20 years. But by reinvesting the interest earned, the initial £1000 investment grows to £1629 over 10 years (this is a 26% uplift in total interest earned) and £2,653 over a period of 20 years (a 65% uplift in total interest earned).

The effect is even clearer when shown in a graph:

It’s easy to see that the longer the period of time over which interest is compounded, the greater the effect becomes. So, by reinvesting your capital and interest with RateSetter, you’ll benefit from the boost generated by compounding interest, making your money grow even more!