How to help grow your money through compound interest
By Robert Wright /August 21,2023/
Earning interest on interest: learn how the power of compounding can send your savings rocketing.
- Compound interest enables you to earn interest on interest which is accumulated over time.
- The effect of compound interest becomes extremely powerful over a long timeframe as the amount of interest earned grows.
- Investing in your super is one of the most effective ways to potentially maximise the benefits of compound interest.
Einstein has repeatedly said that compound interest is the eighth wonder of the world. While it may appear complicated, it’s actually a relatively simple concept that can accomplish extraordinary things over time.
What is compound interest?
Compound interest enables you to earn interest on interest which is accumulated over time.
Metaphorically speaking, it’s like planting a tree. When that tree grows, it produces seeds that allows you to plant other trees. Those trees will also grow and produce seeds of their own. So with enough time, you could turn one tree into an entire forest.
The difference between compound and simple interest
When it comes to earning interest, or a return on your money there are two types of interest you could earn.
Compound interest enables you to earn interest when you invest a sum of money; but in addition to this interest, you’ll also earn interest on the interest you’ve earned.
With simple interest however, you’ll only earn interest on your original sum of money invested. For instance, if you invest $10,000 into a savings account and earn 5% interest compounded annually, in the first year your interest earnings will be $500 (5% x $10,000).
However, in the second year, your interest will be calculated based on the original amount you invested, plus the interest you earned in the first year – $10,500. In total over 3 years, you would have earned $1,576.25 in interest.
With simple interest, your interest earnings won’t increase year on year so you’ll continue earning just $500 over the 3 year period leaving you with $1500 in interest earnings.
Compound interest is a long term investing strategy
The effect of compound interest becomes extremely powerful over a long timeframe as the amount of interest earned grows.
Warren Buffett is the epitome of someone who values long term investing. He attributes the majority of his success to identifying good businesses and companies with strong fundamentals to buy and hold for the long-term. He then let the magic of compound interest work for him.
One thing that is important to remember is that investing in the beginning doesn’t reap many rewards. It isn’t until years later that you feel the true power of compound interest working for you.
Get started early
Because compound interest is generally most effective over a long timeframe, in order to truly see its potential, the earlier you start investing your money, the better. So it’s generally really not about how much you’re investing but more about how much time you’re allowing your money to grow.
How you can earn compound interest
One way to earn compound interest is through a bank account. While this approach carries very little risk, it’s generally unlikely that your returns will be enough to outpace inflation so this is something to keep in mind.
Investing in your super is one of the most effective ways to potentially maximise the benefits of compound interest.
Why? Time is on your side. The more you contribute to your super early on in life, the higher potential for that money to grow by the time you need it as a result of compound interest.
Of course though, you need to bear in mind that you cannot access your super until you meet a condition of release. This includes reaching the legal age for retirement, among other things.
When you’re paid dividends from shares, you can withdraw that dividend as cash or you can reinvest it back into the issuing stock. This means you’re earning dividends on dividends, also known as compound interest.
The bottom line: When it comes to investing, compound interest and time are truly your best friends.
Dividend cuts – what can investors expect?
By visual /May 13,2020/
Since the financial crisis more than a decade ago, investors have had to search much harder for income as savings rates have plunged.
Many have looked to the equity market to help them achieve better income returns, with large numbers of companies increasing dividend payments to shareholders as they have grown.
It is likely that equities will continue to provide a relatively attractive source of income for those comfortable with the risks of investing in the stock market. However, regrettably, dividend payments for most equity income investors are likely to be lower than in previous years for the foreseeable future as a result of the coronavirus crisis.
Here we explain why and give our views on the outlook for dividend payments over the medium and longer term.
The equity income fund model
Equity funds that have a focus on investing for income as well as the potential for capital growth are called equity income funds.
A dividend is an income payment from an investment. The dividends that investors receive from an equity income fund directly reflect the dividends received from companies that the fund holds shares in. This money is paid out to unit or shareholders in proportion to the size of their holdings.
One aim in managing an equity income fund can be to increase dividend payments to investors over time. A manager may aim to achieve this through focusing investment on successful businesses that have the potential to increase their dividend payments as they increase their profits. The income and capital value of an equity income fund can go down as well as up and investors may not get back the amount they invest.
How the coronavirus crisis has impacted companies’ dividend plans
The coronavirus crisis has blown the carefully laid plans of large numbers of companies around the world way off course.
For the time being, the revenue streams of many good businesses have been drastically reduced. And for some, in the most exposed sectors, they have effectively evaporated. All the while, there are costs that must still be met alongside obligations towards key stakeholders including employees, customers and suppliers.
As in any crisis, there are exceptions – some supermarkets, for example, have experienced a surge in sales during the lockdown period – but the management of a great many companies now have a single overriding focus: navigating their way through the current unprecedented conditions as best they can.
It should therefore come as no surprise that many companies have announced that they are reducing their dividend payments or in some cases, suspending them entirely. In most cases we believe this should be welcomed in the short term as it will provide necessary funds to shore up businesses, helping them to ensure their long-term viability once the immediate crisis has passed.
We expect to see more companies follow suit over the coming months, with many likely to err on the side of caution in setting their dividend policies, given the high degree of uncertainty we are all living with.
Companies that have been forced to accept Government assistance will find it difficult to continue paying dividends. And in some countries, banks have been instructed not to pay to a dividend to preserve capital so that they can provide finance to companies that need it.
The knock-on impact on equity income funds
When investing in equities for income you are left with a choice between trying to maintain the level of your dividend income or accepting that it will fall.
Importantly, this does not have to mean abandoning an aim to grow your income over the long-term. This can sensibly remain a key consideration in your stock selection. Instead you may wish to consider each company on an individual basis, assessing how well they are positioned to come through the crisis without fundamental changes to their long-term business case, which will impact their ability to pay dividends going forward.
An insistence on maintaining the dividend of an equity income fund in the current environment would, in most cases, force you into investing in a narrow, less diversified range of stocks. Accepting a cut in the dividend on the other hand can allow you to maintain a focus on investing in the companies that are most likely to help you achieve your long-term objectives in both income and growth terms.
Bouncing back following a crisis
In the wake of crisis situations, companies that have cut their dividends to prioritise cash holdings that enable them to operate and trade effectively can often recover faster than those that have blindly pursued the maintenance of dividend targets set in a completely different environment.
When the economic environment improves, these companies have the potential to restore and grow their dividends again from a position of comparative strength. A look at past crises shows that the overall impact on the intrinsic value of a business from a temporary dividend cut is generally small and, for long-term investors, it is important not to lose track of that fact amid the short-term market noise.
The outlook for dividends and equity income investors over the medium and long term
The shape of the recovery from the coronavirus crisis remains far from clear. There are indications that the strict lockdown conditions in place in many countries could be relaxed reasonably soon, enabling some limited activity to resume.
Realistically however, we all face a long wait for anything approximating ‘business as normal’ to resume, given that the only route to achieving this appears to be the development and implementation of an effective vaccination programme on a global scale.
This is unlikely to come together until well into next year, even if one of the vaccines that have already begun human trials proves effective.
This means that dividend payments over the next three years or so are likely to remain well below levels seen in 2019. There is no precedent for the current crisis but estimates of the eventual cut in dividends for the UK market as a whole in 2020 have so far ranged from around 25% to as high as 50%.
Longer term, a return to ‘business as normal’ for the economy is likely to lead to a return to ‘business as normal’ for dividends and by extension equity income funds.
It is possible that we could begin to see more companies around the world adopt more conservative dividend policies along the lines of Asian businesses. However, the aftermath of past crises would suggest that while companies may change their behaviour for a couple of years, they often then revert to the way that things were before.
What kind of money parent are you?
By Robert Wright /April 05,2019/
Many parents approach the topic of money differently, but could your way of doing things influence your kids’ success?
The majority of Aussie mums and dads recognise that they’re accountable when it comes to shaping their children’s perspective around money matters.
A recent report published by the Financial Planning Association of Australia (FPA), revealed parents listed themselves (95%), followed by grandparents (63%) and teachers or coaches (59%) as the top three biggest influencers when it came to instilling money values in their kids.
What money conversations are parents having?
As part of the research, parents said they mainly concentrated on day-to-day issues when talking money with their children, admitting that more contemporary issues, such as making transactions digitally, were sometimes overlooked.
What parents said they discussed:
- 52% – how to spend and save
- 43% – how to earn money
- 32% – how household budgeting works
- 24% – how much people earn
- 19% – making online purchases
- 13% – in-game app purchases
- 5% – buy now, pay later services, such as Afterpay.
What approach do you take with your kids?
The research undertaken indicated that there were four prominent personalities parents assumed when discussing money with their children, with some parents initiating conversations more frequently, while others were sometimes a little more hesitant.
The four distinct personalities that came out of the research included:
The engaging parent
- You have the most conversations around money with your kids and feel comfortable doing so
- You tend to have a higher household income
- You’re more likely to use money to encourage good behaviour in your children
- Due to high engagement, your kids are often more financially prepared than other kids
- Your kids have a greater interest in learning about all types of money matters.
The side-stepping parent
- You are less comfortable talking to your kids about money so have fewer conversations
- You may have less money coming in as a household
- You’re less transparent about what you earn and money matters in general
- You tend to provide the least amount of pocket money and as a result your children may be less interested in learning about money and how to make transactions.
The relaxed parent
- You’re comfortable talking to your kids about money but don’t do so too often
- You take a relaxed approach to money matters and are transparent about money issues
- There is little financial stress in your home
- Your relaxed nature may lead to your children missing out on opportunities to learn about money, which means your kids may need to explore money matters on their own.
The do-it-anyway parent
- You’re not always comfortable talking about money but still have frequent conversations
- You’re mainly concerned your child will worry about money if you talk about it
- Despite your discomfort, your perseverance generally pays off
- Your teenage children are more likely to have a job than the average child.
What approach is best according to the research?
Engaging parents were more likely to report that their children were more curious, confident, and financially literate than they were at their age.
According to parents who fell into this category, their children were the most equipped to understand and transact in today’s digital world and their teenagers were the most likely to have a job and make online purchases for themselves or their family.
In addition, the research found children with a paid job outside of the family home were more financially prepared to engage with money.
They were also used to transacting digitally and showed greater interest in learning about paying taxes and superannuation than those who didn’t have a job.
Source: AMP, Feb 2019
Dust off your lunch boxes
By Robert Wright /March 22,2019/
If you want to get ahead with your savings goals in 2019, packing a lunch each day is a great place to start. (And forget the soggy cheese sandwich, as with a bit of planning and thought, you’ll be guaranteed to give your colleagues lunch box envy.) With ING research showing that Australian employees spend a whopping $129 on average per month filling their bellies at lunchtime, you could tuck away over $1,500 in your savings account in one year alone, just by getting a little lunchbox virtuous…
So why dust off the lunch box?
Tuck into the savings
With the average lunch being $15 a day, it’s not hard to give your savings a major boost by cutting out the daily pilgrimage to the sandwich shop. And it’s not just money that you’ll be saving, there’s more…
Quality ‘you’ time
People often say buying lunch is an excuse to get out of the office. However, instead of spending half your lunchtime standing in a cafe queue, you could spend that time meaningfully. Go for a run or walk around the nearest park. You’ll not only fit in your 10,000 steps but it will clear your head. The best way to come back alert and refreshed to work.
How often do you get excited about getting take away, and then feel underwhelmed or like you need a decontamination shower afterwards? As well as being more expensive than bringing food in from home, takeaway food can often be less fresh and nutritious than your own pantry. It’s also hard to justify buying fruit from a takeaway cafe or shop too because it’s often more expensive then supermarkets. So to guarantee your daily ‘five’ veggies and ‘two’ fruit intake, it’s worth being ready to pack and go.
In our waste conscious society, it’s good to look at our food wastage. Packing up a lunch each day is a great way to decrease food waste and save leftovers from going furry in the fridge. You can take last night’s meal as is, or be creative and give the dish a lunchtime twist.
Gain savings, lose pounds
With a combination of having more time to exercise at lunchtime and by bringing in nutritious and controlled amounts of food (without the temptation of buying that banana cake at the counter) your healthier lifestyle could convert to diminished kilos.
How to create lunch box envy
Planning is key to rolling out enviable packed lunches each day. Shop for your lunches on the weekend, and batch cook and freeze/chill items such as salads, frittatas, soup and rice paper rolls so you can grab and run during the week. You can even freeze sandwiches in advance (yep you heard right)! Just seal them well. Take it one step further and divide and store your food into individual containers in advance to make mornings more relaxed.
Go naked and nude
Treat yourself to some quality Tupperware or splash out on a state of the art Bento box. The beauty of Bento boxes is that you can reduce plastic wrapping waste and go with nude food! The environment will thank you for it. Why not keep your lunch cool with a frozen bottle of water or for extra nutrients, coconut water.
Pick and mix it up
Inject as much variety as you can into your lunchtime treats. If you don’t, you’ll be back in the foodcourt queue quicker than you can butter your bread. Get out of your comfort zone and enjoy the process. Go crazy in the fruit and vegetable aisle, and treat yourself to healthy snacks you wouldn’t usually buy. Try baby cucumbers, snow peas, or baby sweetcorn for quick grab and go snacks. And prep-free fruits, fresh or dried, like lychees, apricots, dates or cranberries. Swap recipes with colleagues and find the perfect sweet treat, such as Taste’s Cacao Coconut Date Balls or Coconut Sesame and Sultana Bar.
Stuck for ideas?
Ditch the daily egg sandwich and be inventive. There’s a wealth of free lunch box ideas online to give you inspiration. Explore making items such as vegetable patties, savoury slices and try quinoa as a base for salads. As well as go-to recipe sites such as Taste and All Recipes, government health and association websites such as the Dieticians Association of Australia are great for recipes and nutrition insight. The Healthy Eating Advisory Service has a great lunch box guide for kids and adults.
Source: ING February 2019