Compound interest becomes particularly important when planning for retirement. The golden rule here is start saving early.
Consider the following example based on an interest rate of 12%. Fred is a wise young man who starts saving £100 per month at the age of 20 and continues doing so for the next 10 years. When he reaches the age of 30 he decides to stop contributing and lets his nest egg accumulate. Joe on the other hand spends his twenties having a good time and frittering away his cash. When he hits 30 he decides to start saving for his old age and saves £100 per month for the next 30 years.
Fred (£100pm Age 20-30) Joe (£100pm Age 30-60)
Age 20 0 0
Age 30 £22,404 0
Age 40 £69,582 £22,404
Age 50 £216,112 £91,986
Age 60 £671,210 £308,097
Look at the results. Amazing isn't it? Despite contributing only 1/3 as much, Fred has accumulated over twice the amount that Joe did.