Here we have two people, Tom and Bob, both aged 20. Tom is the cautious sort, always putting a bit of cash aside for a rainy day, while Bob tends to be less careful with his money, preferring to spend it all on having fun rather than putting it into savings. Regardless of which of these attitudes is philosophically sensible, we can see from the table whose attitude is likely to pay off financially in the long term.

Tom starts paying £1,000 into a savings account each year from the age of 20 (maybe using an ISA or a pension plan or something similar). We’ve assumed an interest rate of 5% for this example, so each £1,000 that Tom pays in will generate £50 of interest per year, which he then reinvests back into the account, i.e. he’s compounding the interest. Tom does this for 10 years, then stops paying money in, perhaps deciding that after being rather boring in his 20s, he really ought to get out there and live a little before he gets too old.

Bob, meanwhile, has blown most of his earnings on expensive wine, fast cars, unwise property deals and the sort of women your mother warned you about. Reaching the end of his 20s and feeling rather haggard, Bob decides that he too should start saving for his dotage. From the age of 30 he starts to put away £1,000 per year, also making 5% per year. He is also compounding the interest.

But a strange thing happens. Even though Tom stopped paying in money once he reached 30, Tom’s pot continues to grow thanks to the power of compound interest. After ten years of paying money in, when they’re both 40, the value of Bob’s pot is still only about 60% of Tom’s. In fact it takes Bob a total of 20 years of contributions to finally build his pot up to the same size as Tom’s, and he’s paid in a total of £20,000 to do so rather than Tom’s total outlay of £10,000.

This is the true power of compounding: the earlier you start saving, the faster your savings will grow. Once you understand this, you’ll be in a much better position to make the most of your money.

So start as early as you can, preferable when 18 or younger.