Organise Your Money by Nina Dubecki

Author:Nina Dubecki
Language: eng
Format: epub
Publisher: Wiley
Published: 2013-02-20T00:00:00+00:00

The effect of compound interest

Let’s say you invest $10 000, and leave it be for 40 years, earning 5 per cent interest compounding annually. How much do you think you’ll have in 40 years’ time? Let’s have a look at figure 3.1.

Figure 3.1: effect of compound interest

Source: originally from fido.asic.gov.au.

Note: this graph assumes all interest is reinvested and doesn’t take into account tax, inflation or fees.

Even though you’ve only invested $10 000 and haven’t added a cent more, you would end up with more than $70 000 because of the way the interest compounds over time. Impressive, huh?

Get ready to be inspired

The effects of compound interest and time on an investment can be dramatic. Consider the following example.

Jessie and Sally are twin sisters aged 21. They have each received $5000 as a gift from their grandmother, to do with as they wish.

Jessie is very well organised, and at the age of 21 invests her $5000. She then adds $1000 every year after that until she turns 30, investing a total of $14 000 of her own money. Content with her savings effort, she adds nothing more for the next 35 years.

Sally does nothing with her money until the age of 30 when she invests her $5000. Wanting to catch up to her sister, she diligently puts away $1000 for the next 35 years, contributing a total of $40 000 of her own money.

Neither Jessie nor Sally touch their interest and leave it in the bank so that compound interest can work its magic. By the age of 65, who do you think has the most savings? Check out figure 3.2 and you might be quite surprised.

Figure 3.2: Jessie and Sally’s savings at 65

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