WTF? Please stay with me here, I promise you‘re going to love this.  

Compounding is what happens when you take a number and increase it over and over (and over and over and over… you get my drift) again by a percentage instead of by a fixed number. So, instead of adding ten each year, it‘s about adding 10% each year. What? Okay. We know that for many people, percentages don‘t mean a lot. So, here‘s a simple example to show you how this is different, and why you should care. 

The magic money box – turning $100 to $150 and then $161  

Let‘s pretend you‘re a kid. Imagine you have awesome parents who give you $100 for doing a few jobs around the house, finishing your homework and basically not making their life a living hell. They explain to you that if you leave the money with them (instead of buying sticky things that never come out of your Mum‘s carpet, or toys, or lip gloss, or whatever‘s making your heart sing at that second) that they‘ll add 10% to your money box every month.   

Okay. Now, this math is pretty easy – I know you‘ve got this one! 10% of $100 = $10 more.  

Now, it‘s probably going to be hard to give up $100 of instant gratification. Let‘s face it; you don‘t even need to be a kid to find that hard! But if they showed you this little chart, I think you‘d at least give it some thought.   

Then your epic parents explain there’s some extra magic at the bottom of the money box. Because the way compounding really works is that you don‘t just get an additional 10% of your original $100 every month. Instead, you get an additional 10% of your total dollars every month. 

Month 0 (when you start) you have $100 
Month 1: 100 + (100 x 10%) = $110 
Month 2: 110 + (110 x 10%) = $121 
Month 3: 121 + (121 x 10%) = $133 
Month 4: 133 + (133 x 10%) = $146 
Month 5: 146 + (146 x 10%) = $161 
 

Total extra dollars after 5 months = $61! 

How cool is that? 

So, this very unsexy, altogether uninteresting concept of compound interest is surprisingly exciting after all! As our favourite Fierce Girl of Finance, Belinda White says, “What‘s not to love about free money?“ 

How ‘free money‘ works for you (and against you) 

For you 

Small changes you make today can have a significant impact on your future. Now, we don‘t approve of the media obsession with criticising our love of lattes and avo on our toast. Seriously! Can‘t a girl eat her brekkie in peace? But they do have a teensy-weensy good point. The more we have in our savings account, super fund or in investments, the more it can grow through the benefits of compounding interest. It’s the grown-up version of the magic money box. 

Against you 

Just remember, the same is true for debt. The longer you leave paying off credit cards, or indulging in Afterpay but neglecting to pay on time, the more it‘s going to cost you in the long run. Now, we know sometimes there are things you just have to have. And you‘re an adult. You can decide for yourself! But if you can hold out and leave those dollar bills alone to grow, you‘re going to feel like a kid again every time you pick up your money box and give it a shake. Because it will be heavier, and the jingle jangle of coins will promise bigger returns than the thrill of buying a bag of sweets. Or shoes, or champers, or … you get the drift!  

Simple ‘free money’ hacks you can do today  

Waiting longer to buy
Paying off debt
Spending less
Saving more
Investing 

And of course, sorting your super today is going to make sure you have more dollars invested and growing for your future. For those of you who can live on a little bit less today, topping up your super, even by a little bit each year, is going to make retirement so much sweeter.   

If you‘re ready to nerd out, head over to our FAQ page to learn more about the impact of compound interest on your super savings. ?

General information only

Finance topics we discuss in our videos, on our website and in other marketing material is general in nature. It doesn’t take into account your personal circumstances, your financial situation or your specific needs. You should consider seeking independent legal, financial, taxation or other advice to check how this information relates to your unique circumstances.

Super Fierce Pty Ltd (ABN 22 632 423 575) is the holder of Australian Financial Services Licence (AFSL no. 534567).