Giving the gift of compound interest

The first lesson most children learn about money is what they can spend it on – lollies, video games, the latest fad - but it’s a parent’s obligation to also teach them about managing their money.  And the earlier we can teach them about the power of compounding, the more financially aware they will become. 

 Compounding is the road to riches.  It is safe and sure and anyone can do it.  All you need is perseverance to stay on the savings path and the intelligence to understand what is happening.  Compounding is earning interest on your interest.  The more money you accumulate the larger the return each year.

Did you know…  Using 7% interest (not taking into account CPI / inflation), with the effects of time in conjunction with compound interest,

Money will:  Double after 10 years,

Treble after 16 years,

Quadruple after 20 years,

Grow to a staggering seven and a half times after 30 years!

What this means is that the sooner you start the easier it is!  Wherever you are in life’s journey, now is the best time for you to do something and encourage others to do the same.

Let’s look at an example.

David starts a savings program at age 17 and for eight years he puts away $2,000 each year into a fund that earns 9% a year.  After that he doesn’t add any more to his savings fund.  Jenny is also 17 but she puts off starting her savings program until she gets to age 25 – just when David stops saving.  Jenny starts saving $2, 000 a year and keeps it up every year until she is aged 65.  She has $675,764.  Amazingly through the power of compounding David who hasn’t saved anything for the last 40 years has $692,796 - $17,032 more!  The eight years that David saved were worth more than all of the 40 years that Jenny saved.

You’re probably saying, “Where will the average 17 year old find $2,000?”  If your adult child is working they may qualify for the federal government’s co-contribution scheme.  As well a s teaching your children about compounding, you could encourage them to salary sacrifice $1,000 into their super each year and depending on their annual income, they may be eligible to take advantage of the co-contribution scheme which would have the government add another $1,000 to their account.

It’s worth sitting down and showing them the figures and relating them to the bigger and better things they can buy once they’ve let their money sit for a while.  There are some aggressive investment strategies available for young people who are not as risk conscious.