Why low interest rates are hurting you

THE main finding of the Cooper enquiry into superannuation was that 80%of Australians are "disengaged" with their super.

Please read on because I'm about to discuss issues which could cost you hundreds of thousands of dollars if you get them wrong.

Because of the way compound interest works, it takes a big difference in the interest rate to make much of a difference to the outcome if the term is short.

If a person was considering taking out a personal loan of $25,000 to buy a car, and they could pay it back over two years, the repayments would be $1119 a month if the interest rate was 7%, and $1154 a month if the rate was 10%.

Obviously the rate is of little importance - the borrower would be better off to concentrate on any additional fees that may be charged.

It works the same way if you're investing - if the term is short, the rate matters little; but if the term is long, a change in rate can make a huge difference.

If your superannuation balance was $150,000 now, and your salary of $60,000 a year increased at 3% per annum, the balance at age 65 would be $855,000 if you could achieve a net return of 10% per annum. However if the best you could do was 8%, the final figure would drop to $670,000 - if all you could achieve was 6% the final balance would be only $526,000.

The lesson here is that the major factor which will determine the amount you end up with in superannuation is the rate of return, after fees and taxes,that you can achieve on the funds you have invested.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noelwhit@gmail.com.


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