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One of the main long-term benefits of 
investing is the impact of compounding. 

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Albert Einstein once described compounding 
as the eighth wonder of the world. But what  

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does it mean and why’s it so powerful?
Well, effectively, compounding is when you  

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earn returns on your returns. So the longer you 
invest, the more you can potentially benefit. 

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Say you invest £10,000 and after the first 
year it’s gone up in value by 5% and is now  

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worth £10,500. If it grows by another 5% in the 
second year, that’ll be 5% of £10,500, not just  

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the original £10,000, so by the end of year two 
your investment would be worth £11,025, and so on. 

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Over time, compounding can have a significant 
impact on overall investment returns. 

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It’s a bit like a snowball rolling down a hill. 
It starts small but then gets bigger and bigger. 

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You benefit from the effect of compounding 
with cash savings too because of the interest  

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you earn. However the effect tends to 
be greater with investments because you  

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not only reap the reward if share prices go 
up and the value of your investments rise,  

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but you can also reinvest any dividends you 
receive which helps turbo charge things further. 

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Here’s an example in pounds and pence.
If you invest £5,000 each  

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year from the age of 18 and assume 
it grows by 5% a year, it would be  

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worth over £700,000 by the time you reach 60.
But if you wait until you’re 30 to start you’d  

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only have about £350,000 by the time you hit 60.
This is why investing is so-well suited to  

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long-term financial goals. The idea is to get 
invested, and stay invested. It’s all about  

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time in the market, not timing the market. 
So the sooner you start the better, because  

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you’re giving your money more time to grow and 
longer to benefit from the magic of compounding.