Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.
This is a famous saying by Albert Einstein and when applied can make a real difference to your lifestyle.
Australian’s are generally poor savers and most are concerned about not having enough money in retirement. Saving earlier in life will make a big difference. The best time for putting a small amount each week into savings and allowing compounding to do its magic is yesterday. I say yesterday as the is no better time to start to take financial action.
The more time you provide yourself the greater the effects of compounding to grow your wealth.
Save by paying yourself FIRST:
When receiving your pay check the first payment you should make is to yourself. Once you pay yourself use the rest of your income to pay other commitments. By always paying yourself first you are putting some money aside into savings.
Then let compounding do its magic.
The effects of saving and compounding is profound.
Here's an example: Let’s take a 20 year-old university student who pays themselves first each week of $80. If this regular savings was made until the age 65 (retirement age) with an annual return of 6% the overall return would amount just under $1m.
The effects of savings and the magic of compounding is illustrated in the graph below.
By saving $80 a week from the age of 20 for 45 years the total savings put away amounts to $187,200. However, the effects of compound interest results in total interest of $768,211 amounting to $955, 411.
Other assumptions need to be considered such as tax, annual returns and where you place your investments.
Do it Yourself:
Try the ASIC Money Smart calculator yourself so you can dial up and down the key numbers to run scenarios for your future.
Your Financial Journey:
45 years from now seems too far away to worry about this, right?
Taking control now means you will not look back with regret.
Now that you know the magic formula of a small amount of saving and the benefits of compounding you can look forward to seeing your hard work grow.
Written by Simon Micallef.
Simon Micallef is the Managing Director of FinFocus (Financial Focus) and has worked in the financial services industry for over 30 years. Simon consults to the financial services industry and is passionate about helping people take control of their financial position and personal cash flow.
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