It is all down to the power of compounding. The longer you leave your money invested, the greater the returns. This magic of compounding is so powerful that a very small sum, given many years to grow, will do so, so much more than a much larger sum of money invested years later. So the sooner you get that money working for you, the better.
Say you had invested £100 a month in the FTSE All Share index over the past 10 years and chosen to take the income, you could now be sitting on a savings pot of £15,626. If, on the other hand you had reinvested these dividends you would now be sitting on a pot worth £18,977. That’s a difference of more than £3,000.
The snowball effect
Over 20 years the difference between the portfolios is even starker. In this scenario, someone who wanted to take the income from their investment would now be left with a portfolio worth £34,522. If they instead reinvested their dividends their pot would have grown to £50,811. That’s a difference of over £16,000.
But the true power of compounding is realised over the long term. Over 30 years, the gap between the two portfolios widens markedly. The investor who chose to take their income would have a portfolio worth £71,877, however the portfolio of those who chose to reinvest their dividends would be worth almost double that at a whopping £143,443.
How long will it take me to double my money?
There’s a handy little rule of thumb you can use to find out how long it will take you to double your money. Called the rule of 72 – you divide 72 by the interest rate and you will get an idea of the number of years it will take you to double your money.
You can use it to work out the rate of return you need in order to double your money. Say you want to double your money in 25 years, then you divide 72 by 25 and you will see the rate of interest you need to meet your goal is 2.88%. Need to meet your goals sooner? Then a 4.8% return will see you double your money in 15 years.
Remember, it is only a rule of thumb, there are no guarantees that it will come good, but it’s a good way to see how long it will take you to reach your goals.
The early bird catches the worm
The same principle applies when investing in your ISA. Many people don’t think of using their annual ISA allowance until it’s the end of the tax year, but getting in early and investing at the start of the financial year gives you a definite advantage.
The same goes for the Lifetime ISA. If you’re between 18 and 39 you can save up to £4,000 a year and be rewarded with a £1,000 tax-free bonus from the government for every year that you do so until you’re 50. There’s also annual growth to factor in, so the sooner you start, the better, all round.
Give your kids a head start
While they say youth is wasted on the young, you can help your children get a head start by investing on their behalf.
Figures from Fidelity4 show that by saving just £42.50 a week (that’s approximately £184 a month) into a Junior ISA as soon as your child is born, then assuming growth of 5% per year and taking into account fees, they will have a savings pot worth £57,020.96 when they are 18.
Who knows, they might even thank you for it one day.
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The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change. Junior ISAs are only available to UK resident children under 18 who do not have and are not eligible for a Child Trust Fund (CTF). Please note that if your child was born between 1 September 2002 and 2 January 2011 the Government would have automatically opened a CTF on your behalf so your child will not be eligible for a Junior ISA. The investment is locked away until the child reaches 18 years old. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.