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www.interest.co.nz shows compounding options

Media release
Release date: 15 May 2005

www.interest.co.nz shows compounding options

www.interest.co.nz today released a new tool allowing savers to assess how interest can be compounded on their term deposits.

This tool is important. Investors have almost $70 billion invested in both bank, and non-bank term deposits in New Zealand, a nest-egg that has been growing faster than +12% per year.

All institutions offer compounding options, but some alternatives are more beneficial than others.

And, banks have default options when a depositor fails to make a choice, that can significantly disadvantage a depositor's return.

www.interest.co.nz now sets out what each institution offers to gain the best result from interest compounding. This information is listed on the term deposit interest rate pages, by institution, with helpful links to explain the options.

Compounding is powerful, especially over long periods(1). Essentially it is interest-on-interest, and over time it generates a momentum that can grow a modest balance into a major financial resource.

But, three things significantly affect the power of compounding interest.

The first key is the interest rate. Obviously, on the same compounding basis, higher rates will grow to larger amounts, faster. (Depositors also need to consider their risks with any investment, and www.interest.co.nz 's SQP Score© allows you to rank institutions by some key measures in their financial statements.)

The second major factor in assessing compounding growth is your withholding tax rate (RWT). Because the IRD takes their cut each time interest is credited to your account, compounding in New Zealand only applies to your after-tax return.

And thirdly, how often the institution credits your account with interest earned dramatically affects your earnings. An example best shows the effect. Assume a deposit of $25,000 deposited at 7.5% for a range of years, and an RWTax rate of 19.5%.

How much you will have after …
if you deposit $25,000 at 7.5%pa: 5 years / 10 years / 15 years / 20 years / 25 years
Simple interest – no compounding 32,547 / 40,094 / 47,641 / 55,188 / 62,734
Compounding annually 33,521 / 44,944 / 60,270 / 80,811 / 108,351
Compounding semi-annually 33,665 / 45,332 / 61,053 / 82,213 / 110,706\
Compounding quarterly 33,739 / 45,533 / 61,460 / 82,944 / 111,939
Compounding monthly 33,790 / 45,670 / 61,737 / 83,443 / 112,781

Clearly, compounding makes a big difference. The more often interest is credited to your account, the bigger difference compounding makes. And, the longer you can leave a deposit to compound, the higher your benefits from compounding will be.

Compounding nearly doubles your returns over 25 years for the same interest rate, for the RWTax rate used in the example.

In addition, if you need interest paid out for living expenses or a special purchase, www.interest.co.nz also now shows how of often each institution will pay you. This also varies between institutions. Some will pay monthly, most quarterly, but some only pay semi-annually, or annually. The default systems for some banks is 'at maturity', which can be a big and unwelcome surprise if you neglect to sort it out when you make the deposit.

These new enhancements to the www.interest.co.nz pages reinforce the value to depositors of the features provided in this website, and will be another reason why this free service continues to grow strongly. It is now New Zealand's premier website for investors and borrowers.

end.

1. Because compounding is really powerful over long periods, the law prohibits perpetual trusts. Long ago, governments figured out that if you let compounding run for hundreds of years (such as in a perpetual family trust), it would eventually soak up all the money in the economy.

© Scoop Media

 
 
 
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