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Getting out more than you put in

Over time, you can turn $1,000 into thousands just by committing to saving small amounts regularly and taking advantage of a compounding investment strategy.

If you have money in a savings account, that money will earn interest. If you don’t withdraw that interest and instead leave it in the account, your savings balance will increase.

When your next interest payment is calculated, it will be calculated on the larger amount and earn even more interest. And so it goes on.

Imagine the impact if you also put in a little extra money each month. Over the years, you would earn interest on an increasingly bigger amount, meaning you would eventually get out much more than you initially put in.

The same principle applies to other types of investments, such as shares. If the company you are invested in pays out a dividend income, for example, it may also offer you the opportunity to reinvest this income and buy more shares.

Your reinvested earnings then add to the value of your initial investment, and the next time dividends are paid, they will be calculated off this higher amount.

Remember though, shares are a more risky type of investment than a savings account. Not all companies distribute dividends. Additionally, it is still possible for your shares to fall in value over time, even if you do receive and reinvest your dividends.

Learn more about the different types of investments and how to minimise risk.

The key factor in a compound strategy is time. The longer you have, the more effective compounding can be. Think about how much you’d have today, if you’d only started a couple of years ago.

But, it’s never too late, so think about how you can get started investing

understanding compounding interest

 See your shares, property, savings and super in one place with MyWealth.

 Browse our range of share and investment options

 Commonwealth Financial Planner can help you develop tailored strategies to finance your future. Your initial, no-obligation consultation is complimentary.   

MyWealth is provided by Commonwealth Bank of Australia ABN 48 123 123 124 (‘the Bank’). Financial services offered by MyWealth are provided by the Bank, except share trading which is a service provided by Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (‘CommSec’), a participant of the ASX Group and Chi-X Australia. CommSec is a wholly owned but non-guaranteed subsidiary of the Bank.

This article is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. Past performance is not necessarily indicative of future performance. You should seek independent financial and tax advice before making any decision based on this information.

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