A breakdown of compound interest and how it works in long-term investing. The video shows why starting early with superannuation contributions matters, using real examples to demonstrate how your money grows faster when earnings compound over decades.
Compound interest. I know we've all heard of it, but what does it actually mean? Albert Einstein, pretty smart guy, he called it the eighth wonder of the world. He said, you're either earning it or paying it. So with compound interest, it's simply the notion of getting interest on interest or getting growth on growth. And so if you have any children and you want to set your kids up for life, all you need to do is Simply put in $50 to an ASX 200 or ETF index fund. So just invest $50 per week, every single week for five years. At the end of the five years, you stop investing. You never touch it again. By the time they hit 65, they'll have a million dollars purely and simply because you created that compound interest on that initial $50 per week all those years ago. We've got two brothers. One was called Ben. He invested $2,000 every single year of his life from the age of 19 to 27. So for eight years, he invested $2,000 per year, which is $16,000 in total. He then stopped investing. His brother Arthur thought, I've got to play catch up here. And then he started investing $2,000 every single year from the age of 27 through to 65. That's 39 years of investment. At $2,000 per year, he's invested $78,000 in total. So Arthur invested 78 grand. His brother Ben only invested 16 grand. Who do you think had more money at the age of 65? The guy who invested two grand a year for the first eight years or the guy who invested two grand a year for the remaining 39 years? It was actually the first guy. He invested $16,000 in total because he was getting interest on interest on interest for eight years more. He actually ended up with over $2.2 million in retirement. His brother only had $1.5 million in retirement, even though he invested more and for longer. That's the power of compound interest. Now, your superannuation fund is compound interest in action. And that's why it seems to grow and grow and grow like a big snowball. So my only bit of advice for you is to speak to your employer, and let's pretend you're on $100,000 per year. Your current employer is already putting in 10 grand per year into super on your behalf. You need to ask your employer to set up a salary sacrifice of another $5,000 per year. So that means your employer is putting in 10 grand, and then your salary is sacrificing another 5 grand. So in total, you have 15 grand going into super per annum. That 5 grand is tax deductible because you're getting before the tax man is actually getting their hands on it. So you're only paying 15 cents tax on that five grand in salary sacrificing. So it's an awesome tax saving there. But you're going to allow that compound interest to really take hold, and that snowball is going to get faster and faster and faster. So you're going to have a better quality retirement. You're going to have more money in retirement, which is going to give you more choices. But you just need to make that one simple decision now is to salary sacrifice another 5% of your salary into your super fund, and you'll never, ever regret that.
