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Speaker 1: Hi everyone, and welcome back to start here the very

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Speaker 1: special mini series within Sugarmummer's Fireplay, where I answer your

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Speaker 1: real life money questions with simple, practical and empowering general advice. Now,

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Speaker 1: today's question comes from a listener who wrote, Hey, Canna,

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Speaker 1: I keep on hearing how important it is for women

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Speaker 1: to invest. However, I can't get my head around how

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Speaker 1: compounding interest works. I have five thousand dollars saved up

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Speaker 1: to get started and invest, and I plan on and

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Speaker 1: regularly investing four hundred dollars per month on top of this.

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Speaker 1: But before I start, I feel I need to understand

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Speaker 1: how compounding interests will help me become financially independent. Can

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Speaker 1: you please help me break this down. I'm really sorry

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Speaker 1: if this is a silly question, Tara, all right. First

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Speaker 1: of all, there is no such thing as a silly question.

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Speaker 1: The only silly question is the one that is not asked.

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Speaker 1: And if there is one thing that makes the biggest

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Speaker 1: difference between struggling financially and building serious financial independence, it

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Speaker 1: is compounding interest, especially when it is given time to flourish.

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Speaker 1: So what I'm going to do is break this episode

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Speaker 1: up into four or five parts. Firstly, I'm going to

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Speaker 1: explain exactly what compounding interest is, and then I'm going

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Speaker 1: to give you some examples so you can see what

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Speaker 1: the potential exists for your financial future, Tara. And then

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Speaker 1: I'm going to explain how to make the most of

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Speaker 1: compounding for everybody's financial benefit. And then I'm going to

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Speaker 1: show you some projections which can help you see what

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Speaker 1: actually lies ahead for you. So let's get cracking, all right. Compounding,

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Speaker 1: what exactly is it? Okay, I'm going to strip it

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Speaker 1: right back. Compounding is when you earn returns on your

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Speaker 1: returns which create more returns on your returns. For example,

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Speaker 1: say you invest five thousand dollars and it grows by

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Speaker 1: say seven percent in the first year. That's three hundred

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Speaker 1: and fifty dollars. So next year you're earning seven percent,

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Speaker 1: not on the original five thousand dollars, but you're earning

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Speaker 1: seven percent now on the five thousand, three hundred and

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Speaker 1: fifty dollars. So next year comes around and still it's

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Speaker 1: another say seven percent, and that seven percent is based

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Speaker 1: on the new fresh balance, which is you know, is

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Speaker 1: five thousand, three hundred and fifty. So by the end

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Speaker 1: of the year you'll have about five thousand, seven hundred

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Speaker 1: and twenty four dollars and fifty cents. That means your

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Speaker 1: money is actually working harder and harder every year without

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Speaker 1: ever lifting a finger. Albert Einstein famously said compounding interest

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Speaker 1: is actually the eighth wonder of the world. He who

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Speaker 1: understands it earns it, he who doesn't pays it. Now,

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Speaker 1: this is why compounding interest is your best friend as

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Speaker 1: an investor. But it's also a double edged sword because

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Speaker 1: it is your worst enemy as a borrower, because interest

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Speaker 1: can actually spiral out of control in the exact same

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Speaker 1: way when it's applied to debt. So a loan of

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Speaker 1: five thousand dollars at seven percent interest means that if

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Speaker 1: you don't make any repayments, you will actually owe five thousand,

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Speaker 1: three hundred and fifty by the end of the year.

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Speaker 1: And yes, if that same loan goes on for another

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Speaker 1: twelve months, you will be charged seven percent interest on

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Speaker 1: the five thousand, three hundred and fifty, which means you

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Speaker 1: will end up owing now not five thousand dollars your

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Speaker 1: original loan. You owe more five thousand, seven hundred and

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Speaker 1: twenty four dollars and fifty s. So you can now

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Speaker 1: see how people build wealth easily but also can quickly

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Speaker 1: get in over their head, all to the dual power

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Speaker 1: of compounding interest. So your question is is do you

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Speaker 1: want this compounding interest, this eighth wonder the world working

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Speaker 1: for you or against you? So let me give you

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Speaker 1: some examples of compounding interests, because it's really quite remarkable

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Speaker 1: and a little bit sexy. So let's take case A.

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Speaker 1: If you invest one thousand dollars a year at three

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Speaker 1: percent interest, after twenty years, you'll have about twenty six thousand,

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Speaker 1: eight hundred and seventy dollars, where twenty thousand dollars has

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Speaker 1: been invested through your regular deposits. You know that thousand

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Speaker 1: dollars every single year, but you've actually earned with your

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Speaker 1: money working for you thanks to compounding interest, six thousand,

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Speaker 1: eight hundred and seventy dollars. Now case B, if instead

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Speaker 1: you were able to access a higher interest rate, you're

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Speaker 1: able to earn more, and of course you know risk

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Speaker 1: versus return. But at seven percent interest, that same money

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Speaker 1: grows to nearly forty thousand, nine hundred and ninety five

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Speaker 1: dollars in the same period of time. But this is

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Speaker 1: the cool thing. This time you have actually earned twenty thousand,

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Speaker 1: nine hundred and ninety five dollars in interest on those

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Speaker 1: same twenty thousand dollars deposits. So you can see here

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Speaker 1: get a higher interest rate, your money is working harder

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Speaker 1: for you with compound interest. Now, let's just ramp it

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Speaker 1: up a little bit, because I know, Tara that you

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Speaker 1: have so much potential ahead of you. Now, what we'll do.

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Speaker 1: We'll take the same projections, but instead this time we're

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Speaker 1: going to add five thousand dollars at the start and

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Speaker 1: then continue on with our thousand dollars per month now

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Speaker 1: using exactly the same variables seven percent interest twenty year period.

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Speaker 1: By the end of that twenty year stage, it will

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Speaker 1: actually jump to almost sixty thousand dollars, three hundred and

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Speaker 1: forty four dollars over that same twenty years. So now

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Speaker 1: your twenty thousand dollars worth of deposits has actually helped

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Speaker 1: build thirty five thousand, three hundred and forty four dollars

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Speaker 1: in interest. So what is the lesson here? Well, the

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Speaker 1: higher the return, the more you can contribute, particularly upfront

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Speaker 1: as well as ongoing, and the longer that you leave

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Speaker 1: it invested to work its magic, the more exponential, the

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Speaker 1: results will be for you. This is exactly why starting early,

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Speaker 1: even if it's only with a small amount of money

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Speaker 1: one hundred dollars, ten dollars, I don't care. Just get started,

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Speaker 1: and by adding money into your investment portfolio every week

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Speaker 1: or every four at night or every month is so

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Speaker 1: incredibly powerful over the long run. By year twenty, the

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Speaker 1: annual earnings in case B are more than triple in

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Speaker 1: case A. And this is all because of compounding interest

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Speaker 1: accelerating over time, particularly towards the end of the twenty

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Speaker 1: year period. So why do they say time is everything? Well,

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Speaker 1: it's an important saying because it's accurate. Time is the

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Speaker 1: secret source. After about fifteen to twenty years, this is

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Speaker 1: where that growth that I'm talking about, that exponential growth

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Speaker 1: really does take off, like it's like a rocket ship,

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Speaker 1: but only later on, after you've been patient, you've been resilient,

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Speaker 1: you've stuck to the game plan. It is no longer

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Speaker 1: a flatish straight line. It is exponential. It's onwards and upwards,

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Speaker 1: added an increasingly aggressive rate for your financial wealth. As

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Speaker 1: you would known. I'm always banging out about my financial

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Speaker 1: mentor Peter Thornhill, and he has a brilliant book which

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Speaker 1: is perfect for you right now, Tara, to read, called

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Speaker 1: Motivated Money. It has I think it's like seventy or

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Speaker 1: eighty thousand copies. It's absolutely mind blowing and so inspiring,

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Speaker 1: but perfect for you to read right now. And he

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Speaker 1: shows in his book, which is the latest version, the

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Speaker 1: value of one hundred thousand dollars invested in nineteen seventy

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Speaker 1: nine in the Industrial Shares index would be worth over

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Speaker 1: twenty million dollars today. Now, when you look back at history,

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Speaker 1: these numbers are mind blowing. You've got to go on

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Speaker 1: to check this out for yourself. Everybody who's listening. It's

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Speaker 1: not just Tara. If you invested in one dollar actually

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Speaker 1: in Australian shares back in nineteen hundreds and reinvested every

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Speaker 1: single dividend today, it would be worth over one million dollars. However,

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Speaker 1: if you had put that same one dollars into cash

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Speaker 1: and to say a term deposit, it would only be

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Speaker 1: worth about two hundred and seventy two dollars. So, if

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Speaker 1: you're investing for the long run, where would you prefer

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Speaker 1: to invest your money? Cash or industrial shares? Now, obviously

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Speaker 1: that's a whole other episode. In itself. You know where

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Speaker 1: to invest, how to invest, how to get started, you

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Speaker 1: know how to navigate the whole process. But I want

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Speaker 1: to make you aware of the empower of compounding interest

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Speaker 1: and the difference over the long run between two very

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Speaker 1: different asset classes, and of course with very different levels

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Speaker 1: of volatility and risk. But these are all very manageable things.

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Speaker 1: And of course it goes without saying. Inflation is still

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Speaker 1: very important here. You've got to pay attention to it

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Speaker 1: because inflation will actually impact the real value of that money.

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Speaker 1: But you need to remember the principle of compounding interest

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Speaker 1: remains the same. Growth assets outpace inflation over time, and

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Speaker 1: that is exactly the power of compounding. When you use

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Speaker 1: growth assets like shares and property. As I said, yes,

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Speaker 1: they are volatile in the short to medium term, but

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Speaker 1: long term effect for your wealth creation journey it could

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Speaker 1: potentially be extraordinary for you. So if this is so incredible,

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Speaker 1: let's call it even you know, magical. Why are people

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Speaker 1: not taking advantage of this? Well? I may sound a

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Speaker 1: little bit tough here, and I don't mean it in

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Speaker 1: a bitchy way or a judgmental way, but I also

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Speaker 1: want to be really honest here because by me sharing

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Speaker 1: with you why people don't do this, I'm helping hopefully

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Speaker 1: protect you from falling into this exact trap. So there

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Speaker 1: are lots of reasons why people don't do this, even

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Speaker 1: though it's so easy. People are impatient. Everybody's impatient, particularly

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Speaker 1: right now in the world that we live in. But

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Speaker 1: but when it comes to investing, people are not willing

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Speaker 1: to do the work. They want that get rich quick scheme,

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Speaker 1: even if it means taking a ridiculous amount of risk

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Speaker 1: on board. Also, a lot of people are too conservative,

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Speaker 1: you know, they leave their money in cash, which, as

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Speaker 1: we all have seen with recent inflation, you know, barely

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Speaker 1: grows at all. But interestingly, I believe that often that

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Speaker 1: fear is actually really a lack of understanding as to

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Speaker 1: what investing is really all about and how to obviously

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Speaker 1: navigate those risks in a smart, intelligent, proactive way. And

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Speaker 1: you know, they don't really understand all the opportunities, the

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Speaker 1: pros and cons admittedly of investing in long term growth assets.

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Speaker 1: The other thing is some people procrastinate, you know, they

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Speaker 1: leave it too late to get started, and they never

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Speaker 1: actually give compounding interest the opportunity to really flourish for them.

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Speaker 1: And also then they try and time the market. You know,

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Speaker 1: they're waiting for the next crash. But the thing is

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Speaker 1: the next crash may not happen for another five years,

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Speaker 1: and in the meantime, they've missed out on like four

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Speaker 1: and a half years of growth and they end up,

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Speaker 1: you know, buying at a really high point in the

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Speaker 1: market or selling low, or in most cases, they continue

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Speaker 1: to sit on the fence and never actually buy at all.

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Speaker 1: You know, often we see this sometimes with the analysis paralysis.

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Speaker 1: And this is why I say stop looking in the

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Speaker 1: rear vision mirror and look at where you're go and

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Speaker 1: keep your eye on the price. Look forward. Now. The

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Speaker 1: other thing is why people don't do it is or

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Speaker 1: they do it wrong even sometimes and then they pull

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Speaker 1: their money out. Is they don't do it in an

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Speaker 1: intelligent way. You know, they don't properly diversify their money.

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Speaker 1: They put all of their money into say one stock.

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Speaker 1: Now that is fraught with risk. You're going to have

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Speaker 1: exceptional levels of market volatility. And yes, it may pay

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Speaker 1: off great, but also there's a lot of risk that

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Speaker 1: you're taking on. It's not how I would do things.

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Speaker 1: And this is why I'm such a huge fan of

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Speaker 1: listed investment companies which you can buy on the ASX,

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Speaker 1: you know, not product device examples. You know, for example, Whitefield.

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Speaker 1: I have a brilliant episode which I'll go and make

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Speaker 1: sure I link actually for everyone in the podcast notes

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Speaker 1: with Angus Gluski, who is the head of Whitefield, and

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Speaker 1: it's absolutely incredible the information that he shares in what

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Speaker 1: goes into that investment portfolio. But something like that or

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Speaker 1: even an eatf the money is properly diversified. Another reason

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Speaker 1: why people don't do this is a fall for fads

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Speaker 1: or even worse scams that promise you know, quick wins

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Speaker 1: but often collapse and leave them with absolutely nothing or

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Speaker 1: something that's very illiquid and they can't actually get rid

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Speaker 1: of and they start holding a lemon of an investment

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Speaker 1: or the other option which I see particularly you know,

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Speaker 1: as people change scenarios and sometimes this is unavoidable. But

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Speaker 1: that sometimes this is just a bad decision, and that

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Speaker 1: is people change their mind or they change their game

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Speaker 1: plan before that you know, fifteen to twenty year exponential

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Speaker 1: growth you know, was going to have the opportunity to

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Speaker 1: even kick in for them. Now. Of course, as I said,

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Speaker 1: sometimes it's just the situation you have to sell or

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Speaker 1: make a change, maybe it's a relationship breakdown, or a

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Speaker 1: change in financial situation, or a change in financial goals

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Speaker 1: even but you know, this is why a lot of

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Speaker 1: people will never actually get to experience these amazing benefits

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Speaker 1: of compounding interest. And this is why I say, you know,

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Speaker 1: you've got to get started, Tarror. You've got to stay invested.

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Speaker 1: You've got to make sure your portfolio stays invested, which

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Speaker 1: is very easy to do with you ETFs and list

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Speaker 1: investment companies. And you've got to focus on growing your

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Speaker 1: passive income, not just your investment portfolio or in this

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Speaker 1: case you know interest, your payments, and learning how to

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Speaker 1: ignore the short term noise, the headlines, the panic, you know,

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Speaker 1: the herd mentality, you know, the fear. You know there

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Speaker 1: are so many opportunities to invest every single minute of

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Speaker 1: the day. You've got to know where's the opportunity and

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Speaker 1: which ones are right for you and your goals. Your

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Speaker 1: job right now is to let compounding interest do all

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Speaker 1: that heavy lifting for you whilst you just focus all

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Speaker 1: of your time and energy on your long term financial

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Speaker 1: freedom goals and game plan by putting money into your

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Speaker 1: share portfolio reviewing it regularly, increasing your automatic regular investment plan,

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Speaker 1: adding add hoc lump sum money when you can. That

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Speaker 1: is your job right now. Let compounding interests take care

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Speaker 1: of the rest for you. Now, what exactly does this,

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Speaker 1: now that we've broken it down mean for you, Tara

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Speaker 1: and for everybody listening right now? So, Tara, you said

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Speaker 1: in your DM to me that you've got five thousand

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Speaker 1: dollars to start with, and you're adding four hundred dollars

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Speaker 1: per month. That is almost five thousand dollars a year,

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Speaker 1: which is pretty impressive. Now, if you invested that consistently

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Speaker 1: into a diversified portfolio of dividend paying shares such as

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Speaker 1: you know ETFs or listened investment companies earning seven percent

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Speaker 1: and per ADAM, over a twenty year period, you could

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Speaker 1: be looking at an investment portfolio worth over two hundred

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Speaker 1: and twenty eight thousand dollars with only ninety six thousand

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Speaker 1: dollars of your physical money that has been invested. That's

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Speaker 1: the money that's come out of your pocket. You've put

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Speaker 1: ninety six thousand dollars in to build a two hundred

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Speaker 1: and twenty eight thousand dollars investment portfolio. That is really cool.

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Speaker 1: So you've actually earned over one hundred one hundred and

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Speaker 1: twenty seven thousand dollars in interest. That is, my friend, Tara,

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Speaker 1: your money working for you. And not only that, the income,

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Speaker 1: which in this case is those dividends, which hopefully, if

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Speaker 1: you've invested in say something like Australian industrial shares and

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Speaker 1: have franking credits, should also be growing year after year.

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Speaker 1: At some point those dividends may actually end up being

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Speaker 1: able to cover your living expenses, that is, your bills.

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Speaker 1: And that's the financial independence and freedom that I am

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Speaker 1: talking about. And the beautiful thing for you, Tara, and

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Speaker 1: for everybody listening right now is this is not complicated.

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Speaker 1: This is not confusing, This is not some sort of

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Speaker 1: very active trading strategy. It is really simple. It's not fancy.

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Speaker 1: It just means that you keep on investing as much

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Speaker 1: as you possibly can and you can safely afford to,

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Speaker 1: and you reinvest all the returns, you let compounding interest

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Speaker 1: run its course. And when that day comes and those

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Speaker 1: dividends you decide are big enough for you to start

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Speaker 1: taking and you don't need to worry about reinvesting them anymore,

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Speaker 1: that is when you can choose to switch off the

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Speaker 1: automatic dividend reinvestment plan and take those dividends purely for

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Speaker 1: yourself for you to enjoy. This is exactly what Einstein

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Speaker 1: meant when he called compounding interests the eighth wonder of

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Speaker 1: the world. So how exactly do we maximize compounding? Now

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Speaker 1: that you understand how cool it is, how powerful it is,

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Speaker 1: how do we get it working even harder for us? Well,

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Speaker 1: I've done a quick checklist for you. So number one

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Speaker 1: is just to get started. The earlier, the sooner the better.

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Speaker 1: In fact, I hope you, Tara, listen to this episode

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Speaker 1: and actually get started today. Please can you make sure

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Speaker 1: you just quit the excuses that are holding you back

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Speaker 1: as you're wasting precious time. I also highly recommend investing

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Speaker 1: on a regular basis. I know you've mentioned four hundred

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Speaker 1: dollars per month, and that's brilliant and that's consistent. But

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Speaker 1: when you can increase that amount the moment you can

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Speaker 1: afford to when you get a pay rise, when you

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Speaker 1: get a promotion. Also focus on long term growth assets

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Speaker 1: like shares, property. Yes, cash doesn't have an important part

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Speaker 1: as part of an overall investment wealth creation strategy, but

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Speaker 1: you need to be looking at assets they're going to

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Speaker 1: really work efficiently for you for your long term goals.

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Speaker 1: It's also really important you stay diversified. Stop chasing fads

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Speaker 1: that you might see on social media. Now, this is

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Speaker 1: why I love listed investment companies in ETFs, because they

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Speaker 1: make it super easy and you don't get tempted to

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Speaker 1: go down this like garden path of what's like the

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Speaker 1: latest trend or the latest product, or the latest company

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Speaker 1: and service and not really look at the true financials.

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Speaker 1: Do yourself a massive favor, save that time and energy

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Speaker 1: to earn more money and outsource all those complicated, highly

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Speaker 1: technical and skill based investment decisions to a fund manager,

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Speaker 1: like through a listed investment company or an ETF. The

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Speaker 1: other thing I recommend you do is reinvest every single cent.

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Speaker 1: As tempting as it may be to go and spend

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Speaker 1: a few dividends here and there, don't do it. If

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Speaker 1: you do, you will regret it shortly after you've spent

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Speaker 1: that money. And on that note, any financial windfalls come

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Speaker 1: your way, like a tax refund or a bo or,

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Speaker 1: you sell something if you can afford to put it

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Speaker 1: into that investment portfolio of yours, whatch you grow and

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Speaker 1: then finally turn down the noise. Markets. As I said,

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Speaker 1: they go up and down every single second of the day,

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Speaker 1: but over decades, growth always wins as human endeavor prevails. Now, Tara,

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Speaker 1: I really hope that you are smiling right now. I

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Speaker 1: hope you have a sense of relief and clarity, because

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Speaker 1: hopefully you've just seen the real reason why I am

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Speaker 1: so passionate about getting women investing, not thinking about investing,

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Speaker 1: but actually investing and actually building up six, seven, even

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Speaker 1: eight figure investment portfolios because I believe in every single

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Speaker 1: person who listens to this podcast and to anyone else

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Speaker 1: wondering about compounding. This is how small, consistent actions with

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Speaker 1: patients and of course perseverance really do help build financial independence.

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Speaker 1: Is not about luck, it's not about timing. It's about

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Speaker 1: the quiet, steady magic of returns on returns. Become a

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Speaker 1: bit of a dark horse with building your investment portfolio.

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Speaker 1: And remember, the most important thing is never trying to

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Speaker 1: time the market. It is time in the market. So

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Speaker 1: open up an online share trading account today if you

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Speaker 1: haven't already, and go and invest that five thousand dollars.

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Speaker 1: Set up an automatic regular investment plan, and work on

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Speaker 1: investing more the moments you can. I promise you you

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Speaker 1: will not regret doing this. Now a massive thank you

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Speaker 1: Tara for your question, and of course for everybody else

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Speaker 1: listening and hopefully enjoying this episode. If this episode resonated

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Speaker 1: with you, can you please make sure you share it

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Speaker 1: with a friend or a loved one who needs a

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Speaker 1: reminder to get started investing today and build that five, six, seven,

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Speaker 1: eight figure dollar investment port follow for their financial freedom.

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Speaker 1: And of course, if you have got any money questions

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Speaker 1: you'd like me to cover on this Start Here series,

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Speaker 1: send me a DM on Instagram at either Sugar Mama

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Speaker 1: TV or if you like Canna Campbell Official. Alright, I'll

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Speaker 1: see you next Friday on Start Here. Part of the

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Speaker 1: Sugar Mamas fireplay playlist Chow for Now