Compounding - What's the Big Deal

WHK April 2011 eNewsletter.

By Dewald Burger – Financial Planning Representative

Compounding - What's The Big Deal?

The world is evolving and we are constantly looking for that WOW factor. This starts at an early age. My five-year-old son is constantly asking about the fastest, the highest, the strongest and being the best is very important. Here are a couple of very impressive figures which I had to Google for him:

	The fastest road going car – Bugatti Veyron - 431.07 km/h
	Fastest manned plane – Lockheed Martin SR 71 (Blackbird) - 3,529.6 km/h
	Fastest human being – Usain Bolt - 44 km/h
	Fastest Land Animal – Cheetah - up to 120 km/h

Just imagine his disappointment when I gave him my answer on one of his “extreme” questions. "Dad," he asked, "What is the most powerful force in the universe?" I looked at him, smiled and answered. Son, the most powerful force in the universe is “Compound Interest”.

This is not at all what he expected and he was rather disappointed and taken back by my answer. Firstly, he had no idea what I was talking about and secondly this compounding thing did not sound extreme in any way. I said, let’s Google it and for sure there it was. “The most powerful force in the universe is Compound Interest,” as spoken by Albert Einstein. At first this did not sound extreme at all to him but after confirming that Albert Einstein was the cleverest person ever he was happy again and faith was restored in his father.

So why did Einstein make the statement he did? Well it is rather simple and when you have time on your side the benefit is compounded even more. We have four investors and each will use their $10,000 initial investment the day they turn 65. Let’s assume an annual growth rate of 8% compounding monthly.

Adam’s grandparents invested $10,000 the day he is born. The day he turns 65 his investment is valued at $1,781,709.

Susan, aged 20, saved up money and invested $10,000. The day she turns 65 her investment is valued at $361,635.

After paying off his mortgage, David, age 40, invests his surplus $10,000 cash. Twenty-five years later when he retires at age 65 his investment is valued at $73,402.

Bill age 60 wins $10,000 at the pokies and after careful consideration decides to do the right thing and invest his money rather than spending it on his mates. At age 65 his investment is valued at $14,898.

This is amazing but what is even more amazing is the following. Imagine if instead of receiving 8% on your investment, the investment yields 9% per annum compounded monthly. The future value of each investor is no less than astonishing.

Adam	$3,397,369
Susan	$565,366
David	$94,084
Bill	$15,657

The increase in return can be achieved by either lowering fees and/or increasing the return.

The unfortunate thing about compound interest however is that it not only applies to investing but also to borrowing. A 30-year mortgage will result in a homeowner paying for their property more than two-and-a-half times over.

It is clear to see that compound interest can be your best friend but used incorrectly can be your worst enemy.

Please contact us for a free no-obligation appointment and make the most of your resources.

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T: 02 6728 9920

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This newsletter is provided by WHK and its member firms and WHK Financial Planning (WHKFP) as an information service only and does not constitute financial product advice. WHK & WHKFP provide no warranty regarding the accuracy or completeness of the information. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice by WHK & WHKFP. Both WHK & WHKFP assume no obligation to update this document after it has been issued. Except for any liability which by law cannot be excluded, WHK & WHKFP, its Directors, employees and agents disclaim all liability (whether in negligence or otherwise) for any error, inaccuracy in, or omission from the information contained in this document or any loss or damage suffered by the recipient or any other person directly or indirectly through relying upon the information.

Section 945A of the Corporations Act requires financial planners to obtain information from clients before making recommendations. Equivalent requirements apply also to accountants in relation to the provision of taxation advice. Accordingly, clients and readers should not act only on the basis of material obtained in this newsletter because the contents are of a general nature and therefore do not take into account each person’s individual circumstances and may be liable to misinterpretation. Do not act upon any of the information contained within this newsletter without first obtaining specific advice from your local WHK Adviser.

WHK Group Pty Ltd ABN 84 006 466 351 and WHK Financial Planning Pty Ltd, holder of Australian Financial Services License No. 238244 ABN 51 060 092 631.

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