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The secret of compounding interest saves you money!!!

This week an article in The Age by Noel Whittaker outlined the benefits of compounding interest for both debt and savings.

According to ASIC's Money Smart site, 'compounding interest is interest paid on the initial principal as well as the accumulated interest on money you have borrowed or invested. Compound interest is like double chocolate topping for your savings. You earn interest on the money you deposit, and on the interest you have already earned - so you earn interest on interest.'

This means that if you have $100 and you accumulate $10 interest then you will earn interest on $110. If you add another $10 then you are earning interest on $120.

Compounding interest is often talked about in the sense of paying off your home loan.

According the article, 'Albert Einstein called compound interest 'the eighth miracle of the world' because its effects do seem quite miraculous and it's a simple concept; when you let the earnings on a investment compound, you leave them to grow for you rather than withdrawing what you had earned in interest.

It's a win-win for both investing and borrowing...you're saving and getting interest added to your capital but the writer says that it's hard to put into practice as it takes a while for the benefits to be seen.

In a home loan situation, compounding interest works by reducing your loan term but reducing the amount of interest that you have to pay. That means that by making additional payments you can reduce your loan by years!!!

Come and chat if you'd like more information about how you can pay your loan off sooner.

Here's a link to the article.