The power of one (per cent) and what it can mean for your money
IT’S a very small number but it can make a huge difference to how much wealth you have in the future. It’s the power of one per cent, and here’s how it works.
Saver HQ
Don't miss out on the headlines from Saver HQ. Followed categories will be added to My News.
DON’T forget the one percenters, we often hear from sports coaches and commentators.
It’s those little extras that come together to produce victory in sport, we’re told. And the coaches are right — as long as that extra 1 per cent doesn’t involve sandpaper and cricket balls.
One percenters also deliver victories in the world of finance and investing, where a small number has a much bigger impact than you might think.
When allowed to work its magic over many years, the power of 1 per cent is extraordinary.
CASE ONE: A 35-year-old worker on an average wage has $100,000 in superannuation. Their money sits in a default balanced fund earning 7 per cent a year, and should grow to $534,000 by retirement, according to ASIC’s superannuation calculator However, if they switch to a higher-growth option — earning an extra 1 per cent a year — their super instead increases to $652,000.
CASE TWO: A 1 per cent difference can also work in reverse. Let’s say our worker doesn’t take an interest in the fees they’re paying to their super fund, and instead of being charged a reasonable 1 per cent they’re being slugged 2 per cent. That seemingly small difference will wipe $121,000 off their final retirement balance.
SUPER: Just like Olivia Newton-John, let’s get physical
CASE THREE: An investor wants to grow their wealth over many years by injecting $50 a week into a fund holding a diverse range of assets such as Aussie shares, global shares, property and infrastructure. The difference between a 7.5 per cent and 8.5 per cent annual return is significant when allowed to compound over several years. After 10 years our $50 a week becomes $38,500 (but $40,900 if 1 per cent higher). After 20 years it’s $120,000 ($136,000) and after 30 years it’s $292,000 (or $358,000 with that extra 1 per cent.
This number crunching shows why it’s a good idea for all savers, investors and super fund members to keep an eye on the small stuff. Getting an extra one or two per cent doesn’t have to be difficult.
If you’re investing for the long term, which is anything more than 10 years, consider taking on extra risk for extra return. For example, Commonwealth Bank shares have been doing it tough lately amid the banking royal commission, but over the past decade have still climbed from $45 to $72, and in that time each CBA share has paid more than $36 in dividends.
Check your annual superannuation statement or head online to see what investment fees you are paying, including insurance premiums that may be unnecessarily eating into your nest egg.
Make sure your super is not invested too conservatively, considering that the money is locked away until retirement and then likely to have to spend another 30-odd years looking after you.
Savings account interest rates are frustratingly low, but even half a per cent improvement in the interest rate you receive makes a difference.
Shop around for a good deal, but don’t spend any of your savings on sandpaper — that stuff’s bad for any sporting career.
Originally published as The power of one (per cent) and what it can mean for your money