Question 1

How does compound interest work?

Accepted Answer

Compound interest means you earn interest on both your original investment and on the interest already earned. For example, if you invest $10,000 at 5% compounded monthly, after the first month you earn interest on $10,000. After the second month, you earn interest on $10,000 plus the first month's interest. This snowball effect means your money grows faster over time compared to simple interest.

Question 2

How much will $10,000 grow in 10 years with compound interest?

Accepted Answer

At 5.5% compounded monthly with no additional contributions, $10,000 would grow to approximately $17,310 after 10 years. If you also contribute $500 per month, your investment would grow to approximately $97,400 — with about $27,400 of that being interest earned. The power of compound interest becomes even more dramatic over longer time periods.

Question 3

What is the best compounding frequency?

Accepted Answer

More frequent compounding gives slightly better returns. Daily compounding produces the highest return, followed by monthly, quarterly, and annually. However, the difference between daily and monthly compounding is usually very small. For example, on a $10,000 investment at 5% over 10 years, daily compounding yields about $16,487 vs $16,470 for monthly — a difference of only $17. Most Australian savings accounts compound daily or monthly.

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