The Power of Compounding Interest

Compounding is when the interest on a sum of money, either a deposit or loan, is added to the original amount so that the interest earned also earns interest. Albert Einstein’s popular quote; ‘Compound interest is the eighth wonder of the world. Those who understand it, earn it... those who don’t, pay it’ highlights the impact compounding can have over time, and cautions that it can work either for or against you.

“When you invest in unit trusts, time allows your invested money to grow and compounding makes your money work harder for you,” says Wanita Isaacs, investor education manager at Allan Gray, an independent African asset manager. “Given a long enough period to work, compounding can dramatically multiply the value of your investment so that less of your total investment will be from your contributions and more from investment growth.”

While compounding can be seen as the magic ingredient for successful investing, the same mechanism works against you when you borrow money, for example, through credit cards or a personal loan.

Isaacs explains that the amount you owe earns interest over time and through the effect of compounding, the cost of credit can work out to substantially more than the cash amount you borrowed, depending on the interest you are charged and the length of time you will be paying the loan back.

How does compounding actually work?

In summary, the impact compounding will have on either an investment or a loan depends on:

·         The amount invested or borrowed

·         The time period

·         The growth rate (the rate of return on an investment or the interest charged on a loan)

·         The compounding frequency (the more frequently interest is added to the original amount, the greater the impact of compounding. For example, daily compounding means that you earn returns today on the amount you invested, as well as the returns you earned yesterday on the returns you earned the day before. This has a greater impact than compounding monthly, which has a greater impact than compounding annually.)

The table below uses the example of an investment of US$10 000 and annual compounding to illustrate how compounding works. “After 20 years, your US$10 000 investment will grow to US$67 275 – a gain of US$57 275,” says Isaacs, adding that if your returns had not been added to the original amount and left to grow; if you had spent them instead, the total gain from your investment would only be US$20 000. “Since you would have spent this US$20 000, you would only have the original US$10 000 still invested.”

Table 1: How compounding works

	Amount of your investment	Return rate	Total amount with return earned
Year one	US$10 000	10% annually = US$1 000	US$11 000
Year two	US$11 000	10% annually = US$1 100	US$12 100
Year three	US$12 100	10% annually =US$1 210	US$13 310

How do you ensure compounding works for you?

To benefit from compounding, you first have to start saving and the sooner you start the better. “You also have to be disciplined and not spend the money your investment makes before you reach your savings goal,” adds Isaacs.

The cliché that good things come to those who wait is especially true when it comes to compounding. Both the decision to invest and the decision whether or not to use credit are essentially choices between instant and delayed gratification. “If you choose to use credit you will have to pay for the benefit of instant gratification whereas, if you choose to save, you will be rewarded for delaying gratification,” Isaacs concludes.

Thandi joined Allan Gray in 2008. She is a senior member of the distribution team having previously worked in legal and compliance and marketing in the financial services sector. Thandi completed her Masters of Business Law at the University of KwaZulu-Natal and is an admitted attorney.

The Argument for Long Term Care Insurance

by Richard F. O'Boyle, Jr., LUTCF, MBA

As people age, insurance becomes more and more important. Health insurance and life insurance are the two most common sorts of insurance which are important to older adults. But this doesn’t mean that they are more important than some other, less discussed, options.

One example is long term care insurance. Americans are living longer than ever before. What’s more, because of the size of the Baby Boomer generation, it can be expected that there will be more older adults alive in the United States than at any other time in history. As such, there will be many millions of Americans who will be entering a future which is largely uncertain.

I say this because most Americans are not prepared for retirement. More than half of Americans don’t invest at all, and this doesn’t bode well for older adults who are about to give up work mostly or entirely. Indeed, old age can be very uncertain for people who have savings. Imagine what it must be like for people who have little or none?

If you are an adult who didn’t start investing as a young person, you likely won’t have enough invested at the time of your retirement to sustain your present lifestyle. You may have much less than that when the time comes. One of the best ways to prepare yourself for the most financially prone time in your life, without outside investments, is to pay for long term care insurance now. LTC Tree is one of the best ways to find great deals and provisions with regard to long term care.

Long term care will be in the future of many adults, more with every passing decade. Long term care can be had in many different forms. People tend to think of nursing homes when this topic is brought up, but there are more options today than ever before. Some older adults live in active communities, which are meant to keep them engaged with life. But for adults who can not afford something like this, or are too ill, another care facility or in home care are perhaps the best options.

The most attractive of these two tends to be in home care. For adults who wish to remain independent during their retirement, this can offer a measure of freedom well into their old age. Depending on the situation, in home care can be more or less expensive than a traditional care home or facility. While some people will prefer one or the other, long term care insurance can help pay the bills when the time comes.

This makes the prospect much more affordable. Rather than having to foot the bill after retirement, or after an injury or illness, you will have been paying for this form of insurance for many years. It’s also a great option if you want to start such an account for an aging loved one. Many people will care for aging parents or grandparents in their future. What better way to prepare them for a happier, more independent life years down the line than with long term care insurance, something to give them peace of mind for the future.

Three Tips That Can Help You Organize Your Search for Auto Liability Coverage

by Richard F. O'Boyle, Jr., LUTCF, MBA

Most Dallas-area auto insurance agents offer auto liability coverage plans that can help you protect yourself against personal and property liability claims while driving. Selecting one of these plans could be worthwhile because they could help you meet insurance requirements that are enforced by the Texas Department of Insurance. 

Here are three tips that can help you organize your search for auto liability coverage policy:

Study Your Personal and Property Liability Coverage Options

Texas state insurance laws require drivers to obtain a minimum amount of liability coverage that protects you from personal and property liability claims that can occur after you have been in an auto accident. 

Most Texas auto insurance underwriters offer personal liability coverage options that usually exceed these minimum requirements. Studying these personal and property liability coverage options is recommended because it can help you customize your personal liability options to suit your driving habits. 

Examine How Your Driving Habits Influences Rates

The price of most automobile liability policies is influenced in part by your driving habits. Some of the driving habits that especially influence the price of automobile liability policies include your use of seat belts and your parking habits. Understanding how these and other driving habits influence your automobile liability rates is worthwhile because it can help you choose the best liability coverage that suits your driving habits.

Examine How Your Home's Location Influences Rates

Contrary to popular belief, your home's location can influence how much you pay for many auto liability policies. This is the case because auto insurance underwriters use information about the safety of your home's location to determine part of the cost of your property liability coverage. 

Most auto insurance underwriters use different statistical methods to determine how your home's location influences your property liability rates. As a result, it is a good idea to examine how your home's location influences your auto liability rates because it can help you choose economical auto liability policies which offer the best coverage options for your family.

As you might have noticed, choosing auto liability coverage policies efficiently requires comparing several important factors that influence the price for auto liability coverage. Comparing these factors requires an organized approach that can help you save time. As a result, feel free to use these tips to organize your search for auto liability coverage that offers the best value.