LEARNING A CALCULATOR

interestToday’s calculator is the compound interest calculator.

Compound interest is the foundation of all financial strategies. This is because the rate of return is the factor that has the most effect on how much interest you will pay back if you take out a loan, as well as the size your portfolio will grow to as you continue to invest in it, and therefore how long it will last once you start to spend it.

Go to my website: www.noelwhittaker.com.au. Click on “Calculators” at the top and select the compound interest calculator, about half-way down the list.

Enter 3% in the interest rate column, $2000 in the yearly investment column, and $1000 as your opening balance. Press “Calculate” and notice that after five years your portfolio would be worth $11,778. Then scroll down to see that after 40 years it would be worth $154,066.

Now change the interest rate to 6%, and press “Calculate” again.

At the higher rate of 6% your portfolio would be worth $12,614 after five years. That’s really not much different. But scroll down again to see the return in 40 years. At 6% your portfolio would be worth $319,187 – that’s more than double the sum it would have grown to at 3% $154,066.

The lesson here is when you are investing short term, the rate of return is not that important, whereas long term the rate of return you can achieve has a massive impact on the amount you end up with. Remember, a person who retires at 65 may well have to make their money last for another 30 years!

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