The power of compounding

Would you rather get £1 million today, or start with a single penny that doubles in value every day for a month? At first glance, the million seems irresistible. But after 30 days of doubling, that little penny would grow into more than £5.36 million. 

That’s the real power of compounding: a snowball effect that, given enough time, could allow your money to grow into something much greater.

What is compounding?

Compounding is the process where your returns earn further returns. 

This is different from simple interest, where your money only grows on the original sum you invested. For instance, £1,000 invested at 5% simple interest grows to £1,500 after 10 years. Straightforward, but limited.

With compound interest, growth happens on both the original investment and the returns it generates. The same £1,000 at 5% compounded annually becomes more than £1,628 over 10 years. 

Plus, the longer you give compounding interest to work its magic, the more you’ll see the effect accelerate. After 30 years, the same £1,000 could more than quadruple.

The early bird catches the wallet

Imagine there are two investors.

Investor A starts at 25, investing £5,000 a year for 10 years, then stops. Total contributions: £50,000.

Investor B waits until 35, then investing £5,000 a year for 25 years. Total contributions: £125,000.

Assuming both earn 7% annually, Investor A will end up with more at retirement—despite putting in less than half the money. The difference is timing. Starting earlier allows gains to compound for longer, which outweighs even larger contributions made later.

How to benefit from compounding

The principles are simple, but powerful:

• Start early, even small. Even modest amounts can gain remarkable strength over decades. Waiting just a few years can have a big impact on long-term outcomes.
• Reinvest dividends and interest. By putting earnings back to work, you unlock the full compounding effect.
• Stay consistent. Regular contributions when you can, no matter the size, help smooth out market ups and downs while steadily building momentum.
• Think long term. Resist the temptation to sell in downturns. Compounding works best when uninterrupted—markets can recover, but money withdrawn cannot compound.

The bottom line

Compounding rewards patience, consistency, and discipline—not quick wins. Whether you’re just beginning your financial journey or further along, the sooner you put your money to work, the more quickly you can find your financial comfort zone.

Issued by Towers Watson Investment Management Limited (TWIM), registered office Watson House, London Road, Reigate, Surrey RH2 9PQ. TWIM is authorised and regulated by the Financial Conduct Authority, firm reference number 446740. TWIM is the Alternative Investment Fund Manager (AIFM) for Alliance Witan PLC. TWIM is part of Willis Towers Watson.
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