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How does compound interest work & how does it affect my super?

Your biggest asset when it comes to compound interest is time…

Thinking about the growth of your superannuation, now, might be the smartest decision you make for your future.

Posted: 24/09/2021

First things first, you are already in luck!

If you’re a working Australian, the good news is you’re already benefiting from compound interest.

That’s because in Australia, your current employer pays 10% on top of your salary and invests it into your super on your behalf, and because of the nature of your super (not being able to touch it until retirement), this means years and years (if not decades) of compound interest.

An example of compound interest in action…

Let’s look further into how compound interest works overtime… okay, let’s imagine I gave you $1,000 to invest into your super fund which has an annual return of 10% (this would be extremely modest, but this is for arguments sake).

Year one: In the first year you would make $100 dollars leaving you with a total of $1,100.

Year two: In the second year you would make $110, leaving you with a total of $1,210.

Year three: In the third year you would make $121, leaving you with a total of $1,331.

Year four: In the fourth year, you would have made $133.10, leaving you with a total of $1464.10.

As you can see, in just four years with just $1000 you were able to make $464.10 from compounding interest. What this is showing us, is that a little can become a lot over time.

Time is your friend, so don’t wait!

Your biggest asset when it comes to compound interest is time. Which is why thinking about your super now, might be the smartest decision you make when it comes to your financial future.

Did you know that according to studies carried out in a survey last year over 89% of young Australians have said they are “apathetic” towards their superannuation fund. It is believed that this generation’s nihilistic, passive attitude towards their super is because of two reasons. One, lack of education and knowledge and two, there is no instant gratification when it comes to superannuation (you have to wait till retirement to benefit).

Both of these reasons are potentially true, however taking the time to navigate this and choose the right superannuation fund could mean drastically different results. Especially when you consider the nature of compounding interest as we have previously discussed. With some superannuation funds averaging a dismal 5% annual return, and others triumphing with 22% taking the time to choose your super fund can be a real game-changer.

When it comes to your super and compound interest, remember time is on your side. The sooner you choose the best super in which to invest, the longer compound interest can affect your results. To talk to us about your super and how to get the best outcome from compound interest, please reach out to us.

With that said, I’ll leave you with the words of Albert Einstein… “compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

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