Two sisters - the power of compound interest

Jenny and Margaret are sisters, aged 28 and 30, both married with young children of similar ages. Their financial circumstances were similar, when their mother died and left each of them with $50,000.

Jenny and her husband decided to treat themselves and the children to a six week holiday in Europe. It was a great time. The trip cost all of the $50,000, taking into account their lost earnings over the six weeks they were on holiday.

Margaret and her husband took a different, less exciting approach. They thought ahead and decided that this ‘windfall’ could make the future much better for them. They spent $10,000 on a New Zealand holiday and a bit on a more recent model car. The bulk of the money - $40,000 was invested in long-term funds.

They worked out that when they plan to retire in 35 years time, their $40,000 would, with compound interest, have grown to at least $95,000. With other savings they could make they were confident about their retirement plans. They also feel good knowing that in 8 years time when their eldest daughter is leaving school, they could make a contribution to the cost of her tertiary education.