The Power of Compound Interest
Having super makes you an investor. The money in your super is invested in things like property, shares, infrastructure and government bonds to give it the best chance of growing. By investing over a long time-frame, when you retire and access your super you can expect to have a fair bit more money than what was contributed to your account by your employers. Currently, employers are required to add 9.5% of your pay to your super and you can make contributions as well.
Saving money v investing money
Putting aside some money each payday into a savings account can be great for short-term goals and little emergencies. With savings you know the interest you’ll get before you save your money and the government guarantees bank deposits so you can’t lose any money. However, the downside is that interest rates can be low, meaning your money doesn’t grow a lot over time.
Your accumulated super is an investment in your future. While savings is about not letting money go, investing is about making more money of your existing money. Investing your money over a longer timeframe is usually done with the expectation of greater returns. Given that your super could be in the system for 40 years or more, it makes sense that your super money is invested to give it the best chance of growing over this timeframe.
Making money out of your super money
Compounding is one of the greatest wonders of investors, it’s when you earn returns on your returns. A simple analogy would be a snowball rolling down a hill, it grows and accelerates the longer it can roll down the hill. Similarly, your super balance grows by contributions and by the returns on your investments accumulating even greater returns overtime.
Using some numbers
Let’s say you invest $10,000 in the share market and get a return of 10% each year (compounded month). You would make $1,000 on your original investment in the first year and in the following year you would get returns on the $11,000 rather than the original $10,000. This process carries on and assuming a 10% return each year, you would double your money after seven years.
The bottom line
Super is investing in many difference assets and uses the power of compounding to help it grow even more while you are working. Any small and modest contributions to your super early on in your career can make a big difference to money you end up with in retirement. Lastly, super might be the biggest investment you have in your lifetime after a house, so it makes sense to be interest in how it is tracking.