At Priority1, we’re passionate about helping Australians build financial confidence—and one of the most powerful tools in your financial toolkit is compound interest. It’s not flashy, but it’s incredibly effective. As Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
What Is Compound Interest?
Compound interest means earning interest on your interest. When you invest, your returns are added to your original investment, and then those returns earn returns. Over time, this snowball effect can lead to exponential growth.
Let’s look at three simple scenarios:
- Case A: Investing $500 annually at 3% grows to $13,838 over 20 years.
- Case B: The same $500 annually at 7% grows to $21,933.
- Case C: Starting with $2,000 upfront and then $500 annually at 7% grows to $27,737.
The difference? Time, return rate, and early contributions. That extra $1,500 upfront in Case C added over $5,800 to the final value!
Why It Matters for You
Compound interest rewards patience and consistency. The longer you stay invested, the more powerful it becomes. After 40 years, Case B grows to $106,805 and Case C to $129,267. That’s the magic of compounding.
This is especially important for younger investors. Starting early—even with small amounts—can make a huge difference. It’s why we encourage our clients to begin contributing to their super and investment portfolios as soon as possible.
Growth Assets vs Defensive Assets
Over the long term, growth assets like shares and property outperform defensive assets like cash and bonds. Since 1900, Australian shares have returned 11.7% per annum, compared to 5.7% for bonds and 4.6% for cash. That’s why a diversified portfolio with adequate exposure to growth assets is key to harnessing compound interest.
Common Pitfalls to Avoid
Despite its power, many investors miss out on compounding due to:
- Being too conservative with their investments
- Starting too late or contributing too little
- Trying to time the market or chase trends
- Lack of diversification
- Falling for “too good to be true” schemes
How to Make Compound Interest Work for You
Here are our top tips:
- Start early: Even small contributions add up over time.
- Invest consistently: Regular contributions build momentum.
- Focus on growth assets: Shares and property offer higher long-term returns.
- Stay the course: Don’t let short-term market noise derail your strategy.
- Seek advice: A well-structured plan tailored to your goals makes all the difference.
At Priority1, we’re here to help you make smart, informed decisions that build long-term wealth. Whether you’re just starting out or looking to optimise your strategy, let’s talk about how compound interest can work for you.