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The snowball effect of compound interest 

Published 17 July 2020

Compound interest is interesting – truly! So what is it and how can you make the most of it?

So quickly, compound interest is earning money on your money. And that money earning money on that money. And that snowballing exponentially. It does the work for you, so you feel like it’s all going in the right direction without much effort.   

It might not be widely understood, but it can be pretty powerful when it comes to planning for your future – especially if you start early!

So how does compound interest work?

With simple interest, you only earn interest on your initial savings deposit and it is not added to the closing balance of the account.  But with compound interest accounts, it’s a snowball effect on your savings. You earn interest on your initial deposit PLUS any interest you’ve earned. Yes, that means you earn interest on your interest.

How can I make the most of it?

Make sure you choose a compound interest account that works for you. Explore different accounts and use the MoneySmart Compound Interest calculator to work out how much you’ll need to save each month in order to reach your long-term goals. The longer you save; the more interest you earn. So start as soon as you can and save regularly. You'll earn a lot more than if you try to catch up later.

Super Interesting

Did you know your super is an easy way to get money growing behind the scenes? It’s automatic once it’s set up and you earn compound interest on your contributions. But keep in mind its long term savings for retirement you can’t easily access.

Compound interest is a long game, but as you can see, one well worth playing.

To explain compound interest further, we’ll use your superannuation account as an example.

Let’s say you have $10,000 in your super account to start with. The below shows what happens if you save $50 a week from the age of 20 based on an average 7.23% super return*.

10 years (30 years old) Total deposits: $36,000 Interest: $22,542 Total earnings: $58,542. 30 years (50 years old) Total deposits: $88,000 Interest: $275,570 Total earnings: $363,570. 45 years (65 years old) Total deposits: $127,000 Interest: $1,014,996 Total earnings: $1,141,966.

You can forecast what you could personally achieve using MoneySmart’s compound interest calculator.

*The returns estimated here do not include fees and charges. 

The earlier you start saving, the better

With compounding on your side, every dollar you invest will add exponential value over time, every year increasing your interest even if you stop investing. For example:  

Early starter (5% ca) Mary starts investing $100 a month when she turns 25. She stops depositing when she’s 45, and just leaves the money to do its thing. With compound interest, by the time she’s ready to retire at 65, her money will be worth more than $113,730. 

Late bloomer (5% ca) Ruby doesn’t start investing until she turns 45. She contributes $100 a month to a compound interest account until she turns 65 and retires. Her actual contributions are the same as Mary’s, but she ends up with $42,863.

The truth is, budgets are better

To help keep track of where your money’s going and make some room in your budget for the things you love, plan your spend with the ANZ Financial Wellbeing Program.

Start planning

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The information set out above is general in nature and has been prepared without taking into account your objectives, financial situation or needs.  Before acting on the information, you should consider whether the information is appropriate for you having regard to your objectives, financial situation and needs. By providing this information ANZ does not intend to provide any financial advice or other advice or recommendations.  You should seek independent financial, legal, tax and other relevant advice having regard to your particular circumstances.

Returns can go up and down. Past performance is not indicative of future performance.