Most people will have at least heard the term 'compound interest', even if it just be from owning using a savings account with a high street bank. But what exactly is compounding? How do we use it to profit in betting?
It is a powerful tool that can be applied in many areas when it comes to accumulating wealth. For those who are new to compounding, by definition it is the process of accumulating the time value of money forward in time.
It is a method of growing money more quickly than time would usually allow.
We make this happen by adding what we accrue in interest or profit to the principal amount investment, forming a larger base on which future earnings can accumulate. As the investment base gets larger, it has the potential to grow faster and in an exponential fashion.
This means that the longer your money is invested, the more you stand to gain from compounding.
For example, let's day £20,000 gets invested at 8% interest per year. The investor decides to withdraw the interest each year to supplement their income, and comes out with £1,600 per year. Over a 10 year period this amounts to £16,000 interest earned.
However, if that investor instead chose to compound this interest each year, over a ten year period their total accrued interest would stand at £23,178.50. That's a substantial £7,178.50 more than if the interest was withdrawn year by year.
Furthermore, this is only the tip of the iceberg as money accumulated this way grows exponentially. Over a 25 year period the total interest would amount to a massive £116,969.50, almost 3 times the total amount earned by collecting the interest each year (£40,000).
It is therefore extremely useful to compound our investment profits.