The magic of compound interest
Saving means putting some money aside for future use. Most of us put “saving” last on our budget – but it should be first. Even if you only manage to save a few dollars a week, it will make a HUGE difference in the long run, because of this thing called compound interest…
Described as “the 8th
Wonder of the World!” by clever dude Albert Einstein, compound interest pumps extra juice into your money’s growth.
Example: if you put $100 in a savings account earning 2.8% interest, you’ll have $103 after a year. If you don’t put any extra money in and just leave that balance, ten years later you’ll have $132. But if you add $10 to your savings each month, after ten years you’ll have $1 515. And if you add $20 a month, you’ll have $2 898. See the difference?
Tip: try ASIC’s MoneySmart compound interest calculator here to see how your money can grow:
Choose your goal
Usually, we save for a goal: new kicks, a holiday, a birthday party… Goals can be short term, medium term or long term.
- Short term: A new dress, the latest Harry Potter book, tickets to an Ariana Grande concert
- Medium term: A new mobile phone, a deposit on your first car, a bicycle
- Long term: A holiday in Europe, money to pay for future studies, a deposit for your first home…
You can have different goals at the same time, and use different ways of saving for them. However you choose to save, pick products with low fees and high returns/ interest rates, and try to make regular contributions.
Ways of saving
There are many different ways of saving and growing your money, but we’ll stick with some of the basic ones to start off with.
A Jam Jar
You know exactly how much money you have and where it is. You can check in and chat to it every day. You don’t have to pay any bank or investing fees.
The money doesn’t earn interest, so it doesn’t grow (unless you add to it regularly). It might be tempting to spend it before you should because it’s RIGHT THERE. Also, sometimes it comes out sticky.
A savings account with a bank
Your money is safe, earns interest, and is not so easy to access and spend before you actually wanted to. You can set up automatic payments from your transaction account to your savings account to make sure you save a little money every month (or week). And if you save it for long enough, compound interest can make a big difference. Banks also offer products such as fixed-term deposits or Money Market accounts, which offer high interest rates, but means you can’t touch your money for a certain period of time.
The interest rate that banks offer can be quite low, which means your money grows slowly, so make sure that you choose one with HIGH rates, and low – or preferably no – fees.
There are loads of ways to invest: shares, exchange-traded funds, managed funds… You can often invest through your bank, or you could use a Robo-advisor (automated financial advisor) such as Stockspot or Raiz. Robo-advisors automatically invests your money for you in a portfolio, based on your goals, age, the amount of money you want to invest and how risky you want to be with it. You can often start investing with a very small amount of money. Investing can be very good for medium- to long-term goals.
You’ll have to do your homework and learn more about investing. But the research is worth it! Remember that investing can be risky, though: and you need to be patient. Sometimes you can lose money, other times you’ll make money, but in the medium to long term, your money will grow.
Start learning more about investing at a website such as www.teenvestor.com/
Your Super is a long-term form of saving and investing for your retirement one day. It is compulsory for your employer to pay a certain percentage of your salary into your super each year, and you can also add payments when you have spare cash. There are many different Superannuation options out there: find one that charges low fees but gives good long-term returns. Talk to your parents and your employer for insight, and make sure to Google “best superannuation option for young people”.
You can’t (and shouldn’t) touch your money until you retire. And choose your Super fund carefully: some of them charge high fees, which can impact your long-term growth in a BIG way.
- If you have a job (full time, part-time or casual), and you earn more than $450 in a calendar month, your employer must make contributions to your superannuation fund. Call them out on it if they don’t!
- Your employer’s contribution to your Super is calculated at the rate of 9.5% of your wages, and forms part of your annual gross wage or salary package.
- If you’re under 18, Super contributions are only payable if you work more than 30 hours a week.
- You can have more than one Super account, but it’s better to just have one: it saves on fees!
- To make sure that you’re getting paid Super, check your payslip and your superannuation account transaction records.
- If you’re worried that your employer is supposed to pay you super but isn’t doing so, the Australian Taxation Office (ATO) can help you with information and advice.
UPDATE: remember, from 1 July 2019, Super is changing! Read here for how and why
Find out more about how to do your taxes here:
Main photo: Brooke Cagle on Unsplash.
Gifs sourced from giphy.com.