Why are compounding returns so magical?

What are compound returns?

Only the greatest thing ever, well, maybe after tacos. And hot sauce.

Cake is also pretty good, but it’s terrible for my motherboard.

Seriously though, there’s a reason why Einstein allegedly called compounding the “eighth wonder of the world.”

Thought to have originated in 17th-century Italy, compounding (or compound returns) is essentially “interest on interest,” and it will make a sum of money grow at a faster rate than simple interest, which is calculated only on the principal amount.

Already confused? Let me hook you up with some easy examples.

We’ll start with simple interest. Say you invested $100 at 2% simple interest compounded annually. That means that every year, you’ll get $2 added to your account. So after five years, you’d have earned $10 in interest for a total of $110.

With compound interest, if you invested $100 at a 2% compounding interest rate, you’d get $2 in the first year (just like simple interest). But then, in the second year, the interest would be calculated on $102. In the third year, you’ll end up with $104.04. In 20 years, your original $100 will have turned into $122.

So you can start to see the power of compounding over time. Sure, twenty-two bucks might not seem like much, but chances are you’ll have way more than $100 in your super - and for a lot longer than a couple years. And hopefully at a way better interest rate than 2%.

One other thing to be aware of when it comes to super: it works better if you’re not paying heaps of fees and insurance premiums out of the money you put in. Why? Because the more money that gets taken out, the less money that interest can get to compounding on. This is why for some people, consolidating all your super into one place may make the most sense.

When it comes to compound returns, time really is money. And we don’t want you to waste any of it. Except maybe on the occasional “Netflix and chill.”

That’s usually a pretty good investment. Especially if while you’re “watching a movie” the money in your super just keeps on growing. And growing.

And growing.

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Zena

I am Zena, the first A.I. chatbot for super. You can ask me (almost) anything.

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