How compound interest works

We all do some type of mahi for our money but how can we supercharge our investments so that our money does the mahi for itself and earns even more without us even touching it?

It all works because of this amazing phenomenon called compound interest.

So what actually is compound interest? And how does it work?

Well, compound interest is the interest that you earn on interest. It supercharges our savings and investments. It's where our money is literally working for us. So let's start by explaining interest.

Interest is what you earn when you let your money get used by someone else, like when you give your savings to the bank or when you invest in a company. And interest is also what you pay when you borrow money. The rate may be high or it may be low.

Let's see it in action using this thing we call the burger analogy.

This burger costs $10 at the takeaway shop.

If we made our own food at home and invested that $10, and we just left it there, then compound interest would start doing its thing. And we would start earning interest on that $10.

If the interest rate was say 5%, you'd earn 50 cents on that $10 after a year.

So at the end of the year, the interest gets added to your $10 and you have $10.50.

So at the end of year two, at a 5% interest rate, you earn even more interest, 52 cents.

Chur!

You now have $11.02. So your interest is literally earning you interest, which then earns more interest and it gets bigger and bigger each year. And that's just with a one-off $10.

Imagine if you were putting aside $10 every fortnight or every week.

Now, wouldn't that be a massive burger? This is the supercharger for your money.

If we invested $10 every week, then after 20 years, assuming a constant 5% interest rate, you've invested just over 10K but it would have grown to over $17,000.

And if you are invested for 30 years, you would have put in around 15K but you would have over 35,000.

And after 40 years, you'd have put in just over 20K but it would have grown to $64,000.

So with compound interest doing its job, and you're supercharging with payments as you go, that's over three times
the amount you put in.

Pretty good, hey?

And that's because of the interest you've earned on it.

The higher the interest rate of your investment, the more it grows and the earlier you start putting money in, the longer your interest has to compound and earn you even more money.

And that's why we should start early. So that's how compound interest works.

On one hand, it can work for us by supercharging our investments, and on the other hands, it can screw us over by
supercharging our debts.

So just remember, compound interest is when interest earns interest. The earlier you start investing, the more time your money has to earn interest and the more money you'll make.

Invest little and often.

And compound interest also affects debt. If you wanna see exactly how it might work for you, have a tutu with our savings calculator.