The magic of compound interest is best described as earning interest on interest. The sooner you start saving, the more you will benefit from the compounding effect.
If you have a savings account that is paying interest monthly, then the following month your balance will include money you’ve saved plus the interest earned from the previous month. You earn interest on interest!
For example, if you save $20 per week from the age of 20 to the age of 65, at 4% annual interest, you’ll have $128,323 and $81,523 of those savings will be interest.
Or, you could save 10% of everything you earn over your working life.
For example, if your pay is $600 net (after tax, student loan, Kiwisaver etc.) per week and you can save $60 per week. Over 45 years, at 4% that will give you $384,969 of which $244,569 is interest!
Due to this opportunity to earn interest, it is always better to receive a dollar today (and grow it), rather than to receive a dollar in the future. This is called the “time value of money”.
The above examples do not allow for inflation, or the tax that will need to be paid on your interest. With the current low interest rates, you might need to be more creative with your investing than just putting all of your savings in the bank.
Have a play with the savings calculators on the Sorted website they are useful to give you an idea of how much you will have saved after a certain amount of time, or how much you need to save regularly to reach your goal by a set date.
Just make sure you start today!