What A Difference Just 1 Percent Can Make With Compound Interest

In Australia there are four major banks. They all offer slightly different products, services, and rates of interest. Many people will just stay with the same bank for life, as let's face it; it can be a real pain swapping banks. But are you doing yourself a big disservice by not shopping around?

Let's look at two couples: John and Sarah vs. Michael and Tina

Both these couples when they turn 30 want to start putting some money away for a rainy day. They are quite lucky they have paid off their homes and they really are only interested in saving money in a bank account. Both couples work out they can afford to put away $500 a month.

John and Sarah find a bank account with 4 percent a year interest. They continue this for the next 40 years. At the end they have $593,450.

Michael and Tina find a bank account with 5 percent a year interest. They too, continue this for the next 40 years. At the end they have $766,689. Would you believe the small amount of 1 percent compounding over 40 years has made a difference of $173,239?

Remember this extra $173,239 was not due to working harder, putting additional money into the account or because of some weird bank error. This additional money was just for finding a bank account with one additional percent interest per year.

Had Michael and Tina found an account with a 2 percent better interest rate of 6 percent. They would now have $1,001,224. Or $407,774 more over John and Sarah; again, for doing nothing more than shopping around and finding a better deal.

But this doesn't just work out for saving money. This works in reverse as well, when paying money back. What about taking out a home loan over 25 years. Say the two couples in 2011 took out a $500,000 home loan and paid minimum payments until it was paid off. Once again, the only difference is one couple pays one percent more over this time in interest rates.

John and Sarah settle for a home loan at 8 percent. After the 25 years, they would have paid the original $500,000 plus an additional $657,724 in interest for a total amount of $1,157,724.

Michael and Tina find a home loan at 7 percent. After the 25 years, they would have paid the original $500,000 plus an additional $560,168 for the total amount of $1,060,168. A saving over John and Sarah of $97,556.

Again to save this $97,556 they have not worked harder, but they have shopped around and got a far better deal.

You should make a date every year in your diary. Think about if you are getting a good deal. Call other banks or home loan companies. Call your own bank and ask if they can put you on a better deal. At least then you would know if you are getting a good deal or not.

Of course this works in all sorts of situations. Can you find a superannuation account with a higher percentage return? A credit card with a lower interest rate. A car loan with lower interest or a term deposit with higher interest. Compound interest can work for or against you. Take the time now to relook at what pecentage rates you are getting in all the products you use. Taking a few hours now to change products or banks may end up saving you literally hundreds of thousands of dollars over the course of your life.