We believe the secret to saving for your child’s future lies behind this riddle: “He who understands it, earns it.”
Saving for your child’s future can be an incredibly important goal. It’s likely you’ll want to use every trick in the book to create as much wealth as possible. This trick, in particular, can be the difference between giving your child £22,000 or £32,071 on their 20th birthday. *
What’s the secret?
- It has been nicknamed the other golden rule of investing
- Albert Einstein called it the “eighth wonder of the world”
Any guesses?
Here are some more clues:
- It could be your “ticket to financial independence.”
- Warren Buffet calls it the “most powerful factor behind his investing success.”
- It can accelerate the exponential growth of your investment
The answer: compound interest.
Here’s a quick example of how it works:
Let’s say you decided to start saving for your child’s future the day they were born. You dropped a single lump sum of £10,000 into an investment opportunity that offered an annual return 6%. Assuming you made no additional contribution, you would have earned a total interest of £618.31 by the end of your first year. That would mean your balance at the start of the second year was £10,618.31. Earning 6% on £10,618.31 would give you £11,274.86 by the end of your second year. Following this formula would give you the following during a 10-year investment term:
| Year | Total Interest in Cash | End of Year Balance |
| 1 | £600.00 | £10,600.00 |
| 2 | £1,236.00 | £11,236.00 |
| 3 | £1,910.16 | £11,910.16 |
| 4 | £2,624.77 | £12,624.77 |
| 5 | £3,382.26 | £13,382.26 |
| 6 | £4,185.19 | £14,185.19 |
| 7 | £5,036.30 | £15,036.30 |
| 8 | £5,938.48 | £15,938.48 |
| 9 | £6,894.79 | £16,894.79 |
| 10 | £7,908.48 | £17,908.48 |
How to make the most of compound interest when saving for your child’s future:
- Reinvest your returns
Compound interest accumulates on the principal amount (i.e. your lump sum of £10,000) and the interest that you earned in the previous year. You can achieve this by keeping your profits in the investment - otherwise known as reinvesting your returns. When you do this, you’re allowing the interest rate to work with more money.
Naturally, the more money you invest, the more money you’re likely to get back. Think about it this way: if you earn an annual interest rate of 6% on a £100 investment, you’ll be left with £106 at the end of the year. Your profit is £6. But if you put £1,000 into the same investment, you’ll be left with £1,060. Your profit is £60. In theory, the more money you put in, the more money you get out. If you decided to spend your profits the moment they came in, you’ll be earning the same amount you did in the first year. The interest rate will only ever be working on the initial amount invested (i.e. £10,000). Leave your profits in and the interest has more to work on; your interest will earn interest.
Property Moose Perk: Any returns you earn from our investment opportunities will be deposited into your E-Wallet, making it quick and easy for you to pop them back into an opportunity of your choice. This way, you can enjoy compound interest at the click of a button. No need to sieve through your bank statements to re-transfer your earnings back in.
- Find an asset class with a high number of compounding cycles
Think about compounding cycles as the number of times you get money back from your investment. You want your money to compound as often as possible. The higher the number of compounding cycles, the faster your wealth can accumulate.
Property Moose Perk: With buy-to-let property investments on our platform, any rental income you earn will be paid to you on a monthly basis. If you reinvest your monthly returns, your money could experience 12 compounding cycles in a single year!
- Time is on your side
In the case of saving for your child’s future, time is certainly on your side. You might find yourself having 20 or so years to create a lump sum of money for them. When you start to save is more valuable than how much you save. It genuinely does pay to start saving now - even if you start small. The more time you give compound interest to work its magic, the more money it will have to work on and the more money it could give back to you.
Property Moose Perk: Not everyone has £10,000 to drop into an investment. When saving for your child’s future, you might only be able to put aside a little bit each month - and that works wonders too. The trick is to start now. Our minimum investment is just £10, so you can start today. Over long periods of time, small contributions can add up to substantial returns!
Written by Jenna Kamal
Sources:
*Based on a principal amount of £10,000 earning a compound interest rate of 6% over 20 years, vs. the same investment earning simple interest.
Disclaimer and Legals
Property Moose does not provide any advice in relation to investments and you must rely on your own due diligence before investing. Please remember that property prices can go down as well as up and that all figures, rates and yields are projections only and should not be relied on. If in doubt, please seek the advice of a financial adviser. Your capital is at risk if you invest. This post has been approved as a financial promotion by Resolution Compliance Limited.
Property Moose is a trading name of Crowd Fin Limited which is an Appointed Representative of Resolution Compliance Limited which is authorised and regulated by the Financial Conduct Authority (no: 574048).
