When you’re younger, it can be tempting to put off saving for the future. Day-to-day life tends to get in the way and there’s so many other exciting things to prioritise, like travelling, buying a house or buying a car. But the truth is, starting saving as early as possible – even just small, regular amounts, can make a big difference to how much you’ll get back in the future.

The sooner you start paying into your pension or other savings, the more time your money has to potentially grow. This is because you could benefit from compound interest.

What is compound interest?

Compound interest is when any returns (profit) you make from your investments, then makes additional returns as a result. For example:

  • You invest £1,000 and make a return of 5%, meaning you now have £1,050.
  • As well as your initial £1,000, you now have an additional £50 in your account that is also invested.
  • Your £1,050 makes a return of 5% the following year, meaning you now have £1,102.50.
  • If your money continues to make a return of 5% each year without you contributing anything else, it would result in savings of £4,925 after 30 years.

This is based on a relatively modest starting investment, and without paying in anything else over time. If you’re able to contribute regularly, and your investments perform well, it demonstrates the significance that saving early could have on your savings. Remember, the value of an investment can fall as well as rise and isn’t guaranteed.

Compound interest could also apply for other investments, such as fixed-rate cash or stocks and shares ISAs.