How Compound Interest Works
Albert Einstein is said to have famously referred to it as the 8th wonder of the world. It has been the source of great wealth for many people and caused persistent debt for others. Compound interest is one of the very most powerful forces in finance, yet it is not widely understood or harnessed. Here’s how it works. In simple terms, compound interest means earning interest on your interest on your interest, and so forth. Superannuation is flawlessly placed to benefit from substance interest because many people’s money is committed to super for many years, so the compounding effect happens automatically. ASIC’s Moneysmart compound interest calculator is an excellent way to try some scenarios and see where compound interest might take you.
Compounding may work backwards for individuals with debt. Mortgage debt is the biggest loan that many people have in their life time, and the eye paid can be reduced if borrowers make extra obligations and let them compound significantly. ASIC’s Moneysmart home loan calculator can help here with the quantity crunching.
Harnessing the power of compound interest may be considered a priority for super fund members, investors, borrowers and savers. As with all money matters, it may be worth seeking budgeting and investment advice around compound interest to make sure this wonder of the financial world works best for you. You may take control of finances with the support of financial advice. Have the self-confidence that originates from dealing with a financial adviser to help you reach your financial goals. The views of the writer are not necessarily the views of the QSuper Board.
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2 ASIC’s Moneysmart superannuation calculator, utilized 1 March 2019. The calculator works for deposition funds only. It shall not work for described advantage funds. We assume your account balance will receive all outgoings and income mid-year, year apart from Authorities co-contributions which we suppose are received by the end of the. We assume that your employer contributes an amount add up to 9.5% of your ordinary time earnings.
3 This is a model, not a prediction. Amounts and repayment periods are estimations only, real amounts might be higher or lower. No account fees are considered. It assumes that rates of interest do not change for the full life of the loan. Interest rates are calculated by compounding on the same frequency as the repayment selected, i.e. weekly, fortnightly, regular monthly quarterly or yearly. It does not consider up-front fees such as loan establishment fees.
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