An added bonus of starting to save early is the effect of compounding interest.

Compounding is when you reinvest the interest you earn on an investment. If you continue to do this over a few years, you’ll be earning interest on your interest on your interest…

Example:

Susan decides to put $100 a month in an investment fund. Jeff decides he can’t afford it just yet. So he’ll invest $200 a month in 10 years’ time.

Let’s assume both started their investment with no initial deposit, and that both earned the same interest rate on their investments, being nine per cent.

In 20 years’ time, both Susan and Jeff will have invested the same amount - $24,000. But, while Susan’s investment will have grown to $67,289, Jeff’s would only be worth $38,993.

A significant portion of the growth in Susan’s investment would be directly attributed to the effect of compounding interest.






Assumptions: Interest rate on both investments is nine per cent; there in no initial deposit made.