30 years of age or younger? Come and visit the eighth wonder of the world.

Our 20s and 30s are more about spending than saving. With university fees, mortgages and children to budget for pensions can often be the last thing on your mind, especially as it may seem a lifetime away. However, when you reach 40 or 50 years old and start thinking about your retirement, hindsight has a habit of popping up to say “gosh, I should have started saving earlier”.

Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it.... he who doesn't pays it.” We, at Chelsea, agree and it may even be the most important concept people can learn about when it comes to their finances, particularly pension saving.

Compound interest, put simply, is 'interest on interest'. It assumes that any interest on an initial investment or debt is re-invested at the same interest rate in subsequent periods. Most readers are probably familiar with the concept, but few people recognise compound interest's true power. To demonstrate what we mean, consider the following example.

If an investor invests £1 a day for 70 years and achieves an annual rate of return of 7%, with all income being reinvested and interest being compounded monthly, how much is the investor left with after 70 years? How much would you guess?

The answer is £685,245*. The power of compound interest is considerable and it has many lessons to teach investors. Obviously, if that rate of return is higher, or lower, you will end up with more, or less, at retirement.

Start investing early
The fact that we chose a 70-year investment term in the example is crucial. Starting earlier gives you a huge advantage; no matter how little you have to invest, it is still worth doing. If we had wanted to make the same £685,245 in 50 years, under the same conditions, we would have had to invest more than £4 a day instead of just £1.

Watch out for charges
It may seem like there is never a good time to invest, but the earlier you start the better (subject to firstly paying off any debts). Now, investing £1 a day isn't really practical, particularly if you are charged for each transaction! After an initial lump sum you can invest as little as £50 a month, quite sensibly and cheaply, via Chelsea.

At Chelsea there are no transaction charges, just a low-cost annual management charge, meaning you can transfer and save lump sums and/or on a monthly basis in an effective way.

If you don't know where to start when choosing funds, why not consider the VT Chelsea Managed Funds or research funds via FundCalibre?

The lessons from compound interest are clear. Start investing early with whatever you have and stay invested for the long haul. It’s very hard to get rich quickly but it’s quite possible to get rich if you keep re-investing and you have time on your side.

Monthly investing
Monthly investing can be a great way to invest in the stock market, without putting all your capital at risk in one go. Chelsea can help you set up a monthly contribution to your pension, also reclaiming the associated tax relief.

Workplace pensions
These are a no-brainer, with your employer contributing to a pension on your behalf. This is basically free money for later in life. The government started an automatic enrolment scheme, which means employers must enrol eligible employees into their workplace pension. It is definitely worth thinking about contributing to this, as your employer may pay in contributions on your behalf.

Personal pensions – ideal for the self employed
If there isn't a workplace scheme available, or even if there is, don't forget about personal pensions. They are a great way of optimising your pension savings and Chelsea can help! With dedicated pension administrators, automatically reclaimed tax relief, competitive charging and a selection of portfolio choices, there is no time to lose in opening a pension with us.

There is a minimum initial investment of £5,000 to open a pension with Chelsea, from a transfer and/or single contribution. With pension saving you should consider investing the maximum that you can afford, but remember that you cannot withdraw pension savings, once invested, until the age of 55.

For more information please complete our quick and simple online questionnaire.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. James' views are his own and do not constitute financial advice.

Compound interest example calculations sourced from: http://www.moneychimp.com/calculator/compound_interest_calculator.htm