Learn how compound interest could help you accumulate more money. Take this one small step for your kids’ financial future.
As every parent knows (even before they become one), raising a child isn’t cheap. But it is possible to save for your kids’ education and future more easily.
One way to do this is by setting up a savings account that can benefit from compound interest, which allows you to earn interest on the money you save, as well as interest on that interest. Think of it as the icing on your savings cake.
Why compound interest works harder for your savings
Could you change your spending habits in order to create a savings fund for your kids?
Could you, for example, give up the amount of takeaway food you purchase weekly and put that money into a savings account that earns compound interest – say $20 in total per week, or $10 per child per week if you have two children? If so, this handful of coins could reap your family significant rewards over time.
Let’s say you have $10,000 in savings and invest it in an account that pays a 2% pa interest rate. In five years, you might walk away with:
Simple interest: A tidy $11,000. You’ve earned $1,000 in interest.
Compound interest paid monthly, no weekly deposit: A larger amount of $11,051. You’ve earned $1,051 in interest.
Compound interest paid monthly, $20/week deposit: At the end of five years you’d have $16,515. You’ve earned $1,315 in interest.
Compound interest is one step up from simple interest, which pays a lump sum at the end of a set term.
You will benefit from compound interest from your initial deposit into the savings account you set up for your children. But if you contribute even a small amount, you’ll see noticeable gains in a short period of time.
It’s worth remembering that, like any income, compound interest earnings must be declared to the tax office, even if it’s savings for a child. Who declares the interest earned depends on who owns or uses the funds of that account. You can find out more about the tax requirements from the Australian Tax Office.
Compound interest without savings
Compound interest still works even if you’re starting without a lump sum to invest in your kids’ savings account. If you open a high interest savings account with compound interest (interest payable monthly) at, say, 2% pa and invest $20 a week, by the time your kids are 25 you’ll be able to give them $33,698. And $7,698 of that will be pure interest. Do it early – the earlier you start, the more you will save.
Earn interest without thinking about it
Like most budgeting and savings goals, the ones that work the best are those you don’t have to think about. You could do this now by setting up a weekly direct transfer from your everyday bank account into the high interest savings account you’ve set up for your kids. Aim to transfer $10 per child, per week, and just forget about it.
Review your savings in a year, not only to tally up the interest, but to also see if you can afford to set a more ambitious savings goal.
Do your research to find the most competitive rate
It pays to do your research to find out which financial institutions offer the highest compound interest returns on your money. Of course, the returns on your savings are first and foremost, but you also need to think about any bonus rates offered, ongoing monthly account fees and the kind of access you want to have to the account. Check out the AMP Saver Account for a competitive rate.
Remember, if your goal is to save for your children’s future, the sooner you start the better. That’s because you could be missing out on earning compound interest along the way that could make a significant difference to the overall amount you save.
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