How the power of compound interest can help your savings grow
We get it, interest isn’t the sexiest subject matter. But having a good grasp on what compound interest is, and how it can boost your savings, is something we think everyone needs to know: it’s looking out for your future financial self.
What is compound interest (in 50 words or less)?
It’s interest on interest. You make an initial deposit into something like a savings account. You earn interest and it’s added to your deposit. Then, you start earning interest on both your initial deposit and the interest you’ve been paid. The cycle continues and this becomes an ongoing, compounding amount.
Let’s say you put $500 into a savings account with an interest rate of 3.00% p.a. every year, for 10 years:
You would have saved a cool $5,500 on your own, but got an additional $904 in compound interest. Cool.
If you’ve already got a decent chunk of savings, and you’re in the position to make higher contributions year on year, the compound interest becomes even more sizeable:
Starting with $5,000 and making a deposit of $1,200 every year with the same interest rate, over the same 10 years, would work out to be almost $3,500 in interest earned.
Compound interest + time is where the magic really happens
Where compound interest really gets interesting is when you give yourself the gift of time and allow it to play a major role in your savings plan.
Take the previous example, but extend the time-frame to 35 years, i.e. the average retirement age (65) for someone who’s just turned 30:
Over that time, you would have saved $47,000 as well as almost $40,000 of interest. That’s some significant savings that could boost your overall retirement fund.
It’s in your hands
When it comes to investing, there’s certainly other options; property, shares and stock. It’s all about personal choice and what you’re comfortable investing in. But, if you’re someone who likes to ‘set and forget’, rather than playing the investment game, choosing a savings account with compound interest could be just what you’re looking for.
Start now – your future self will love you for it
What’s clear from the above examples is that you need to start NOW. Whether your initial deposit amount is modest or not, it’s all about getting time on your side and using that time, plus a commitment to regular deposits to harness the power of compound interest.
Great news. At UBank we offer competitive interest rates (up to 2.87% p.a.) on our savings + transaction accounts, so now you’ve mastered what compound interest is and how it works, sign up and get saving today.