Compounding is one of the keys to successful saving – it’s returns on returns, or earnings on earnings. Generally, we’re not allowed to touch our super until preservation age, so the magic of compounding is left to do its work over many years – with employer and voluntary contributions accruing and our investment earnings all adding up to create savings for our retirement.
Compounding needs a base to work from, and our early working years currently provide this in the form of superannuation guarantee contributions. So how does it work?
More time invested, more money
When you invest a lump sum, over the year it earns a return. At the end of the year, your return is added onto your lump sum. The following year you accrue a return on both your initial lump sum and the return from the first year (assuming it is positive). In general, the cycle continues as your money grows. The earlier you start, the more time your returns have to compound, and the bigger your balance grows.
How can compounding benefit me?
Super is a lifetime investment, which is why compounding works so well in your super. You can’t generally draw on your super until later in life, so your savings benefit from many years of the compounding effect on your investment returns.
Try MoneySmart’s compound interest calculator to see how compounding could work for you.
We can help
In order to harness the benefits of compounding, money needs to be invested for long periods. Given this, you may want to increase the amount you contribute to super via personal contributions or salary sacrifice – and the government provides incentives for you to do this. Which option will work better for you depends on your income and your personal circumstances – we can help you work out which one to choose.
If you need help, contact our Member Services team on 1300 300 820 Monday to Friday 8:30am to 5pm.