Thanks to the magic of compound returns, you don’t have to save every penny of that £30,000 yourself. The trick is to put your money somewhere that pays you compound returns - like an account with a healthy interest rate.
However, interest rates on savings accounts are currently low - generally, lower than inflation. They’re especially low if you don’t want to lock your money away in term deposit accounts. So even if you get a generous 2.5% interest, your money’s still losing 2.5% of its value if inflation is 5%. However, it’s still far, far better than getting 0.1%, or even 0%. So finding a bank account with the best interest rate possible is a great place to start!
Let’s go back to that £116 per week that will get you £30,000 after five years. With an interest rate of 2.5%, that comes down to just £108.
This is the beauty of “compound returns,” or in this case, “compound interest” - because your returns are coming from an interest rate.
It’s the effect of earning returns on your returns. And time is the key factor.
Let’s use a different example. Say you invest £1,000 and it returns exactly 10% every year for five years. After the first year, you’ve made an extra £100. So now you have £1,100. The following year, you’re not making 10% on £1,000 - you’re making 10% on £1,100. So that’s £1,210. That continues until you have £1,645 after five years. That’s a 64.5% return on your investment.
But we know 10% isn’t achievable from high street bank savings accounts. So what about investing?