The first step towards wealth is sorting out your finances, and the first step towards sorting out your finances is understanding the miracle of compound returns. Basically, this is about interest, and how earning a slightly higher rate of interest can make a massive difference to the amount of money you end up with in the long run. How does it work, you ask? Like this:

• You earn some interest
• Next year, you earn interest on that interest
• The year after, you earn interest on the interest on the interest
• The year after that... and so on...

With compound returns, interest earned is put into the pot, rather than set aside, which means the pot keeps getting bigger. The bigger the pot of money, the more interest the money earns... and the more interest that gets put back in. Over the long term, this can really add up!

Compound returns are driven by two factors: rate and time.

Rate

More than anything else, interest rates determine how quickly and how much your savings grow. The higher the rate at which you invest, the more - and the faster - your savings will grow, which is why you should make every effort to get the highest possible rate. How much does one percent point really matter? You tell us:

Four accounts, four rates, and a consistent investment of £100/month

	Investment value at these interest rates
	1%	3%	5%	7.5%
Age 20	0	0	0	0
Age 30	£12,626	£14,009	£15,598	£17,904
Age 40	£26,578	£32,912	£41,275	£55,719
Age 50	£41,998	£58,419	£83,573	£135,587
Age 60	£59,038	£92,837	£153,238	£304,272

Even small differences in the rate of return have a huge impact on the amount of interest earned in later years. The two percent points between the 3% account and the 5% account yield a difference of over £60,000 after thirty years of saving - that's over £30,000 a percent point! Kind of makes it worth it to shop around for the right account, doesn't it?

Time

Another major factor in the growth of an investment is time - how long your investment appreciates interest. As a rule, the longer your investment sits around and gathers interest, the better:

The effect of 5% savings rate over time with regular contributions

		Age started saving
		20	30	35	40
Value of savings at different ages	30	£15,848	£0	£0	£0
	35	£27,188	£6,962	£0	£0
	40	£41,661	£15,847	£6,962	£0
	50	£83,710	£41,662	£15,847	£6,962
	60	£152,204	£83,710	£41,662	£15,847

What you should learn from this table: the sooner you start investing, the better. What you shouldn't learn from this table: "I'm forty-five years old and I haven't invested a penny! I won't even bother - it's too late!" No, no, NO. While obviously it is better to start early, late-blooming savers still get some time in the sun, we promise. All we're saying is... well, get a move on!

How much should I save?

The short answer: as much as possible. We've used a figure of £100 for our examples, but don't be put off if you can't afford to save as much. Small sums soon build into bigger ones and you can increase the amount you save each year. The trick, as we've said, is to start saving early and invest steadily in order to get the miracle of compound interest working for you.

A final note on smart saving

Locked-in savings vehicles like bonds and term deposits tend to offer the best interest rates. If you're willing to sacrifice temporary access in exchange for a top rate of return, consider locking your money up for a spell to give it a serious chance to grow.

10 Steps to Financial Freedom