If you’re just getting started with investing, automating your savings and adding regular contributions to your account is a great way to consistently grow your investment over time and weather the volatility of the market.

If you’ve ever wondered how people turn $1000 into enough to retire on, the secret weapon behind this is compound interest. Okay, so it’s not as magical as Rumpelstiltskin turning straw into gold, but I’d say it’s pretty close. The essence of compound interest is that your money grows over time as the income and capital growth on your investment compound. It’s often depicted as a snowball, the longer you let it roll down the hill and the more snow you feed it, the bigger it gets. Investopedia has a helpful breakdown here.

If you start investing just $250 per calendar month (pcm) and continue doing so over the next 50 years, your little snowball will grow into a life-changing amount. So, let’s break down the numbers (assuming 7% annualised returns).

Image for post

You can test this out for yourself by heading to the MoneySmart Compound Interest Calculator, and see what a difference this might make for your individual situation.

Breaking down a large financial goal into small manageable components can turn an inconceivable goal into a life-changing result. Let’s say you want to be a millionaire in 25 years and you’re starting from scratch. It’s going to take a monthly investment of $1,250 to hit that goal (based on a 7% p.a. interest rate model).

Suddenly becoming a millionaire isn’t just something that happens to other people, it could also happen to you (and you don’t even need to win Powerball). Just imagine what you could do with a million dollars (I know I have)! It’s the kind of money that can completely change the direction of your family’s life, for generations to come.

Stories like the millionaire janitor are possible to those who can learn to play the long game, and it’s really a matter of getting started now rather than later.

Investing small amounts on a consistent basis also smooths out your investment returns, throughout the many ups and downs of the stock market. By investing on a regular basis you are inadvertently dollar-cost averaging your funds into the market. This reduces some of the risk that comes when you try to time the market because you’re getting a spread on entry prices over time. Attempting to time the market typically ends badly for even the most experienced investor, so regularly investing smoothes out your ride.

It’s always a good time to start investing small amounts, on a regular basis.

Kate — HTM Editor & Host

kate-campbell-how-to-money

Kate Campbell is the founder of How To Money. Kate created HTM from a passion to help young Australians start talking about money, and share the resources she finds along her financial education journey. This led Kate to start her own journey to financial independence a few years back and she now works in the Australian financial services industry.

Want to learn more about money and personal finance? Check out our article archive, the How To Money Podcast and the Australian Finance Podcast. Catch us on Twitter @HowToMoneyAUS and Instagram on @HowToMoneyAUS.

Important Information

The information on this blog and website is of a general and educational nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision, as we are not an advisory service. We recommend you consult a licensed financial adviser in order to assist you. The information is based on assumptions or market conditions which can change without notice, and this will impact the accuracy of the information provided. This website and blog occasionally provide links to third-party sites, aimed at helping you gather the information required to make an informed decision — we may receive payment for these referrals.