The power of compound interest

As Albert Einstein once said, ‘Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.’

Compound interest is a simple yet powerful concept that can help your super grow over time. Let's explore how it works and how it can make a substantial difference in the growth of your nest egg.

Picture this: a snowball rolling down a hill—it starts small but grows bigger and faster as it picks up more snow along the way. That's compound interest in action! Unlike simple interest, you earn interest not just on your initial investment but also on the interest it earns over time. In simpler terms, it's interest on interest! This means your money can grow exponentially, especially the longer you leave it untouched. The real magic of compounding reveals itself over long periods of time, as the below diagram shows.

Compund interest chart

Source: https://moneysmart.gov.au/budgeting/compound-interest-calculator
Past performance is not a reliable indicator of future performance.

Joining forces with your super

Now, let's talk about super. Your super fund isn't just a place to stash cash, it’s a long-term investment vehicle designed to provide financial security in retirement, fuelled by your contributions, investment returns and the power of compound interest. Contributions made are invested in various asset classes, with the aim of generating returns over the years. Compound interest plays a vital role in enhancing these returns and accelerating the growth of your super.

The early bird gets the worm

Here's the coolest part. The earlier you start saving, the more time your money has to grow. This growth isn't just linear, it accelerates as your savings pile up and compound on themselves. Even if you can only spare a few dollars a week, those contributions can multiply into a substantial nest egg by the time you retire.

The longer you invest, the more you can also handle market ups and downs. Investment returns vary from year to year, with some years yielding higher returns while others may result in lower or even negative returns. While your super may be affected by investment volatility in the short-term, it is important to keep in mind that super is a long-term investment and over the long-term, there tend to be many more market ups than downs.

Let's illustrate the power of compound interest

Suppose you start contributing $1,000 annually to your super at an average annual return of 7.58%. By the end of the first year, your investment grows to $1,076. In the second year, your now $2,000 investment earns another 7.58%, but now the $76 from the first year's interest also starts earning interest. So, at the end of the second year, your investment grows to $2,233. This process continues, and over time, the growth becomes more pronounced as the power of compounding takes effect.

To show you just how powerful this can be, let's look at contributing $1,000 a year from age 25 to 34 with an 7.58% yearly return. Your $10,000 investment would grow to $136,772 by age 65.^* So, understanding compound interest could really help you move ahead with your super.

Tips for maximising compound interest

Start now: Don't wait until later to start saving for retirement. The sooner you begin, the more you'll benefit from compound interest. There are plenty of ways to contribute to your super.

Be consistent: Make regular contributions to your super to keep the momentum going. Consistency is key to maximizing the power of compound interest.

For example, you could salary sacrifice by asking your employer to pay part of your before-tax salary into your super, and potentially reduce your tax bill while you’re at it.

Choose wisely: Pick investment options that align with your goals and risk tolerance. A well-balanced portfolio can help maximize returns while minimizing risk over time.

We offer a range of investment options, each with a different return target and level of investment risk, plus a Direct Investment option.

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