The power of compound interest

“The most powerful force in the universe is compound interest.” - Albert Einstein

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Women are at an increased risk of retiring in poverty in Australia, but there is something you can do about it and it starts with understanding the power of compound interest.

It’s like this, imagine an orchard filled with trees, with each tree filled with fruit, and each fruit filled with seeds.

The entire orchard could have all started from a single seed.

That’s the power of compounding, and it’s the secret to growing your money trees.

In brief, compounding means your investment grows faster and faster.

Even if the rate of growth remains the same, because it applies to bigger and bigger amounts, your total investment grows faster.

With a small growth rate, at first it won’t seem like you’re making much progress.

But over the course of 10, 20 or 30 years, you will start to see the magic of compounding.

The earlier you start to invest, the more time you have to allow compounding to work in your favour.

You either have time or money, and the more you have of one, the less you need of another.

Regardless of where you invest, the key to wealth creation is to leverage the power of compounding.

The real power of compounding comes with time.

The sooner you start investing, the more your money can work for you.

That’s why no matter how old you are, the sooner you begin saving for retirement, the better.

The Rule of 72

Here is a quick shortcut to determine the result of compounding, by using the Rule of 72:

To determine how long it takes to double your investment, divide 72 by the rate of return.

For example, if you deposit $1,000 in a bank account at 2 per cent interest, it takes 36 years (72 divided by 2) to double your money.

If you could get 8 per cent, it will only take 9 years (72 divided by 8).

You can use this rule in reverse to determine growth rate.

For example, if you want to retire in 10 years and need to double your money, you need to grow it by 7.2 per cent per year (72 divided by 10).

If you have 20 years before you retire, you only need a growth rate of 3.6 per cent (72 divided by 20).

The sooner you start, the better!

Never forget – time is money.

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