Understanding the relationship of time to money, part 3: The 2% Difference

The relationship of time to money - the 2% rule

Understanding key principles and turning them into habits will help to put you on the right path to achieving your lifestyle and financial goals. We know that we will do more of something when we understand it.

The next key principle is….The 2% difference.

When you are investing money (via Super Fund or directly yourself), there are many different areas or investment sectors to choose from, such as Australian shares, international shares, property, bonds, cash… and many subgroups of each of those sectors.

Each investment sector is very different and they each have their own level of risk. Shares and property are regarded as growth sectors, whilst bonds and cash are regarded as more conservative sectors. History shows that growth sectors have shown a higher rate of return over time than the more conservative areas. We’ve also discussed the power of compound interest over time in previous blogs.

If we invest money directly we need to choose where to invest it and make a conscious decision about which sectors we invest in.

The problem that exists for most people with their Superannuation is that they don’t choose where their money is invested – mostly it sits in the default option. Yet, Super is highly likely to be the largest sum of money we will ever have.


Let’s look at the following example:

Chris has an initial Super balance of $40,000. She makes contributions of $356.25 per month (9.5% x $50,000) over 30 years. Her final balance can vary dramatically, depending on the interest rate she receives.

Rate of Return*Account Balance
8%$1,031,291
6%$640,508
4%$408,181
2%$268,209

*Per year, compounded monthly

You can see for yourself what a dramatic difference 2% interest makes to the final balance.

It’s a good idea to know where all of your money is invested and what interest rates you’re receiving. It’s not always best to opt for the highest return – you should seek professional advice around the right level of risk and volatility for you, based on your timeframe and risk preferences.

Do you know which investment option your Superannuation is invested in? If not, I’d encourage you to find out and seek advice if you want to move it to a different type of investment option or achieve a higher interest rate.

 


 

For qualified, professional advice, talk with Ian today on 3822 7201.

Ian Chester-Master is a Certified Financial Planner with over 20 years’ experience and a Director of Your Financial Design P/L.

Your Financial Design Pty Ltd is a Corporate Authorised Representative (1233744) of Madison Financial Group Pty Ltd | AFSL No. 246679 | ABN 36 002 459 001.

General Advice Warning

Before acting on any information in this article, we recommend that you consider whether it is appropriate for your circumstances.  You should not act on any advice until we have fully considered your personal circumstances and provided you with a Financial Services Guide, Statement of Advice and Product Disclosure Statement/s.