Compound Interest in New Zealand: How It Works and Why It Matters for Your Savings
Compound interest is something that can help countless NZ residents save for their futures. This unique form of interest compounds your interest earnings over time, so you slowly earn more and more. This makes it a fantastic tool for any Kiwi who wants to make the most of their money.
But how exactly does it work, why does it matter for your money and how can you make the most of your savings?
What Is Compound Interest And How Does It Work?
There are two main kinds of interest:
Simple Interest. With simple interest, you only earn interest on your initial deposit. So, if you put in $1000, you will only earn interest on that $1000, even if you build interest.
Compound Interest. With compound interest, you earn interest on both your initial deposit and the interest you’ve accumulated. For example, if you put in $1000 and earn $100 from 10% interest at an annual rate, you’ll have $1100. But once another year passes, you’ll earn 10% interest from both your initial deposit ($100 from $1000) and your accumulated interest ($10 from $100), and you’ll have grown your $1100 to $1210. These bits of interest may seem small at first, but just imagine how much extra money you’d have after a few more years.
A significant staple of smartly saving money is being patient. Compound interest lets NZ savers earn money from their savings, exponentially earning more and more and rewarding your patience. It’s always a good idea to start saving early and to continue to add to your savings. In ten years, you could be thanking yourself for your diligent work.
How do you calculate compound interest? Several factors come into play, including the rate of interest and how many times the interest is compounded within a year. You can use this helpful online tool to get an idea of how much money you could make with compound interest.
How To Maximise Your Compound Interest Strategy
What should NZ residents do to make the most of their compound interest?
Start Saving Early. As mentioned above, start saving early. You’ll earn money on your initial deposit and the interest from that deposit, so the more interest you accumulate over time, the better your earnings will be.
Start early. Even putting away a little bit of money now can have a big impact on your future savings account.
Consider High-Interest, Frequent Compounding Accounts. Interest can be compounded at different intervals, including annually, half-yearly, quarterly and monthly. Opt for accounts with high interest rates and a frequent compounding rate. Shop around for the best deals for you. Working with a financial adviser is a great way to find opportunities you may not have noticed yourself.
Reinvest Earnings. It may be tempting to take out the money you’ve earned and put it towards something right now. But, if you leave the interest earned in your account, you’ll earn even more money the next time it’s compounded.
Automate Your Savings. It’s a fantastic idea to continuously put more and more money into your savings or investment accounts. However, manually putting these transfers in can lead to inconsistent contributions and forgotten deposits. Set up automatic transfers to take the work out of adding to your savings. This eliminates human error and stops the temptation to spend your earnings.
Increase Your Contributions When Possible. Your income can grow over time if you are promoted or change to a higher-paying job. If you increase your income, then make sure you also increase your savings contributions to maximise your earnings.
Pay Attention To Fees. Always be mindful of fees on savings accounts or investment products. These can eat into your returns. Fees are inevitable, but you can manage how much money you lose to fees by being smart with your choices and always reading through the fine print.
Understand Your Tax Implications. Compound interest earned is taxable in NZ, so be sure you understand your tax obligations so you can pay your taxes correctly. This can be complicated, so be sure you talk to a professional.
Work With A Financial Adviser. One of the best things you can do for your financial health is to work with an expert who knows what they’re doing. Work with an adviser who’s well-versed in the world of New Zealand finance. They can answer any questions you have about compound interest and guide you on what you should do based on your circumstances.
Build A Stable Financial Future With Future Wealth
Take advantage of your financial health now with professional advisory services. We help our valued clients with risk management, KiwiSaver, home loans and more. Of course, we’re here to guide you through your compound interest opportunities.
If you’re ready to get started, please call us on 027 628 8010. Or, you can send us a message through our site. Hop on a free chat with one of our friendly team members to start your journey towards financial wellness.
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