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Insights

August 08, 2014

The effects of compound interest

Published by:
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Katerina Sousalis
Modoras Pty Ltd ABN 86 068 034 908

Introducing Elise and her brother Tim…

Elise plans to retire in 20 years from now and starts saving an extra $100 per week for this goal. Based on our simple calculations she might expect to have an investment of around $200,000 to add to any other superannuation or retirement benefits she has at that time.

Elise’s brother Tim also plans to put down the tools in 20 years, but he is confident that he can save more money than his sister. So Tim ignores any type of retirement planning for the next 10 years. He then saves twice as much as Elise – $200 per week – for the last 10 years of his working life.

Assuming a 6% return reinvested into the saving plan, the difference is staggering.  By starting 10 years earlier, Elise will have saved just over $200,000 compared to Tim’s outcome of $142,154.

Even though his regular savings amount totals exactly the same as his sister ($104,000 over the period of the investment), Elise has benefited from the compounding investment returns on her money over a longer period of time.

By starting her regular savings plan earlier, Elise has about 40% more capital with which to enjoy her retirement.

Another way to look at it is that Tim would need to save around $280 per week for the last 10 years of his working life (a total of $145,600) to end up with the same outcome as Elise.

The examples we have used here are aimed at highlighting the benefits of time and discipline when it comes to investing in a regular savings plan. To keep The examples we have used here are aimed at highlighting the benefits of time and discipline when it comes to investing in a regular savings plan. To keep things simple, we have not taken into account factors such as taxation, fees and differing investment returns. These factors are nonetheless important and will need to be considered when you are deciding on the type of investment you choose for your regular savings plan.

The type of investment that is best for you will depend on your own specific circumstances, including your goals, timeframes and attitude to risk (volatility).  Returns on different funds vary. things simple, we have not taken into account factors such as taxation, fees and differing investment returns.  These factors are nonetheless important and will need to be considered when you are deciding on the type of investment you choose for your regular savings plan.things simple, we have not taken into account factors such as taxation, fees and differing investment returns.  These factors are nonetheless important and will need to be considered when you are deciding on the type of investment you choose for your regular savings plan.

Start your savings plan now and set your sails for the lifestyle you deserve.

IMPORTANT INFORMATION: This blog has been prepared by Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licences (No. 233209), located at Level 3, 50-56 Sanders St, Upper Mt Gravatt Q 4122. The information and opinions contained in this fact sheet are general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty. Ltd. recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this fact sheet can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.

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