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financial freedom, 2040 finance, fire, early retirement, financial freedom, Millenial, retire early
Why You Should Invest in Your 20’s (Instead of Your 30’s or 40’s)
Posted on: 19 / 5 / 2018
If there’s one financial concept you wholeheartedly embrace this year, make it compound interest.
When most people hear the words “compound interest” their minds immediately harken back to middle school assignments involving long tables of arduous calculations (tables that can be ruined with a single mistake). You may find it hard to believe that applying such a tedious concept to your everyday life could be worthwhile, let alone enjoyable or exciting.
I am here today to tell you that making compound interest is one of the easiest and most gratifying ways you can increase your money, and the younger you are the better off you’ll be if you start accruing compound interest now.
What is compound interest (and why do I care)?
There’s a huge difference between the dictionary definition of compound interest (you know, the one you had to write at the top of your Year 8 economics assignment) and what it means for your future financial goals.

According to the dictionary, compound interest is:

“The addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.”

What this means in real terms is:

1. You can earn simply by depositing savings into in a high-interest bank account that pays interest and;

2. If you do this, you will also start earning money not only on the savings you put in but on the interest you earn as well.

Compound interest is money for nothing. 

How much interest can I earn on my savings?
Bank accounts are one of those products that customers tend to use for years on end without ever researching what else is on offer in the market. It’s only ever when we have a bad experience or undergo a significant life event (birth, death, marriage) that we start to think twice about who we leave our money with.
This is a shame because not only do big banks have a reputation for treating their customers poorly but because there’s often a better deal just waiting to be cashed in on.

Take a look at the interest rate you currently have on your savings account. If you were lucky to lock in a juicy fixed rate ten years ago (when you could earn 5% or more), you’d be crazy to change banks.

But, if you’ve got a transaction account (which usually won’t accrue any interest) or a savings account with a low interest rate, you could be missing out.

Here are some of the best compounding interest rates on the market right now, alongside a graphical representation of how they’ll perform if you save $500 a month for the next ten years:

Bank Australia Bonus Saver Account:
Earn 2.6% interest (variable) each month when you deposit $100 a month and make no withdrawals, no monthly fees. 

bank australia bonus saver compound interest
Westpac Life Account:
Access an ongoing, variable rate of 2.30% p.a. each month you deposit money and make sure your balance is higher at the end of the month than it was at the beginning, no monthly fees.
bank australia bonus saver compound interest
ING Savings Maximiser:
Some banks offer higher interest rates if you link your savings account to your everyday transaction account. Access an ongoing variable rate of 2.8% when you must deposit $1000 or more a month and make five card purchases, no monthly fees.

bank australia bonus saver compound interest
These aren't necessarily the best rates on the market. I covered some of the highest rate savings accounts in this post, though the rates do change. I find Canstar has up to date rates - just watch out for ones that only offer a good rate for an introductory period.

Either way, if you find a better interest rate than these? You can see how much you’ll earn by creating your own graphs with ASIC’s handy online compound interest calculator.

What to look for when choosing a savings account
When it comes to high-interest savings accounts, it pays to shop around and carefully consider not just the interest you can earn but the other costs that banks may charge, such as:
• High account keeping fees
• ATM withdrawal fees
• Monthly statement fees
• Overdrawing fees

And, while you’re researching online you need to be aware of the nature of those easy-to-use comparison websites.

Most people don’t realise that these websites:
Don’t show all of the banks and credit unions on the market: Comparison websites usually have partnership agreements with a select few providers.
Don’t show all of the products their partners offer: Comparison websites get a finder’s fee every time they facilitate the purchase of a product. So, even if you find the best deal online, you might still be able to make further savings by cutting out the middleman and contacting the provider directly.
What’s the difference between investing when you’re 20, 30 or 40?
Because you earn interest on both your savings and the interest your deposits accrue, the earlier you start investing, the more money you’ll have when you retire.

Take the highest performing savings account from the graphs above as an example. If you start saving $500 a week when you’re twenty:

• By the time you’re 30, you’ll have $69,811, $9,811 (16%) of which will be interest.
• By the time you’re 40, you’ll have $161,489, $40,989 (25%) of which will be interest.
• By the time you’re 50, you’ll have $282,750, $102,250 (36%) of which will be interest.

Delay your start by just 10 years and your potential earnings decrease drastically - as demonstrated below):
If you only start saving when you’re forty, by the time you’re fifty you’ll have $212,939 less than the person who started saving and accruing interest when they were twenty!
The kicker
In the above examples, we are using low interest rates, around 2-3%.

The results are further turbocharged if you consider allocating the money towards higher returning (but higher risk) assets like shares and property which can average returns of around 8% over the long term.

The example below assumes $1000 invested once-off, and just let to sit earning a return. 

Note - the feasibility of this is arguable, it is just used to illustrate the power of compounding your returns.
investing early vs later
The bottom line
If you are not a regular saver, or you need to pay off debts before you invest, don’t let the graphs above discourage you. It’s never too late to make a change! Time is money, so what is most important is that you take control of your finances now.
And, don’t forget that you’ll need to pay tax on any interest you made, which will be charged at the same rate as income tax.

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