“Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't ... pays it.” – Albert Einstein

Looking for ways to grow your money? One of easiest ways is through the power of compounding interest.

For some of us, making small financial sacrifices and regular savings over many years is key to long-term wealth. While adding to your savings can be a great way to build your wealth, there are some simple ways of using interest rates to grow your savings faster.

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So, what more could you do?

Your savings, together with the power of compounding returns, will see the value of your saved money accelerate at a much faster rate. Compounding interest is the interest paid on the initial amount invested, as well as the accumulated interest. So, you earn interest on the money you deposit into your saving AND on the interest earned on those savings. Interest on the interest!

To help explain, consider a $10,000 investment earning 10% interest annually. After 10 years, the $10K investment will have reached $25,937, which means you more than double your initial investment, through the power of compounding interest.

Compounding monthly vs annually

Compounding interest can be accrued at different frequencies, most commonly monthly or annually. The more frequently your interest is compounded, the more you earn - it’s that simple. If your interest compounds monthly, you’ll earn more money than if it’s compounded annually as the balance that the interest is earned from is calculated more regularly.

To show you how monthly and annually compounding interest differs over time, consider a $10,000 investment, that earns 10% interest. After year one, you will be $47 better off and after year 10, you will be $1,133 better off. That’s a great result, with no extra work from you.

Compounding interest snowballs your savings

Superannuation uses compounding interest to grow your balance which will help you in retirement. You might not realise it, but in retirement your super might need to last for 20 – 40 years (depending life expectancy) and the cost of living will have increased. Generally, if you earn over $450 (before tax) per month, your employer will pay 9.5% of your pay into super that will use compounding interest to grow until you reach retirement. To boost the amount you’ll have saved at retirement you might want to consider make additional contributions through salary sacrificing or personal contributions (on which you’ve already paid tax).

One of the reasons for saving or making additional contributions to your super or
personal contributions (on which you’ve already paid tax), is the potential for
investment growth, combined with the power of compounding returns. You might be surprised how putting away small, yet regular amounts stack up over time. Use our super projection calculator to see what your retirement could look like.

There are many considerations when looking to add to your super including tax implications, eligibility, and ways to optimise your investments. First State Super provides simple advice that is free to members, to help you understand how compounding interest and additional contributions will boost your retirement savings.