Why investing matters: Simple scenarios to show the difference
Sometimes the best way to understand investing is to see the numbers play out. Let’s look at two everyday people, Sarah and James, and how their money grows in different situations. We will compare saving with no interest, saving in a high-interest account, and investing in the share market*.
Meet Sarah and James.
Sarah and James are both 25 years old. Each decides to put away $20 a week for 10 years. That adds up to $10,400 in total contributions. What happens next depends on what they do with it.
Scenario 1: Money in a bank account with no interest.
James puts his money into a basic transactional account that does not pay any interest at all. After 10 years, he has exactly what he put in:
- Total saved: $10,400
- Growth: $0
- Final balance: $10,400
His money has not grown, but even worse, because of inflation (the cost of things we buy going up in value over time), it has actually gone backwards.
Scenario 2: High-interest savings account at 5 percent per year.
James could also use a high-interest savings account earning 5 percent annually. After 10 years:
- Contributions: $10,400
- Growth: about $3,000
- Final balance: around $13,400
His money has grown, and it has been accessible when he needs it and considered relatively ‘safe’ from a risk perspective.
Scenario 3: Investing in the share market.
Now imagine Sarah invests her $20 a week into a portfolio linked to the share market. The US S&P 500 index has returned about 12 percent per year on average over the past 10 years (Morningstar, 2013–2023) after fees. If Sarah earned that average return over 10 years:
- Contributions: $10,400
- Growth: about $9,500
- Final balance: around $19,900
By Sarah being comfortable to take on more risk and invest her money, that is almost double what she would have had in the high-interest account, and nearly twice what James ended up with.
The lesson
These examples are simple, but they help show a key idea: how you choose to invest your money makes a big difference over time.
- Saving in the bank can feel safe, but with little or no interest your money may not keep up with inflation. That means in the future it could buy you less than it does today.
- High-interest savings accounts give you steady, reliable growth (you generally know the interest rate the bank will pay you in advance) and often suits money for short-term goals or emergency savings. But they are still limited in how much they can grow.
- Investing comes with more ups and downs in the short term and you need to appreciate your risk appetite for that volatility. However, over longer periods can potentially grow your money much faster. The power of compounding, where your returns start earning returns of their own, means small amounts can become much larger over time.
The bottom line.
The key takeaway is that starting matters more than waiting for the “perfect” time or the “perfect” strategy. Whether you begin by saving in the bank, using a high-interest account, or stepping into investing, building the habit is what counts.
As Sarah’s example shows, even $20 a week can turn into something significant. The earlier you begin, the more your money has the chance to grow, and the more options you create for yourself in the future.
* Hypothetical situations, illustrations and examples provided are for illustrative purposes only and you should not rely on such information when making investment decisions. Due to your individual circumstances, your returns may differ from those provided.
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Important Information
This blog has been issued by Instreet Investment Limited (ACN 128 813 016 AFSL 434776) as Responsible Entity of the Raiz Invest Australia Fund (ARSN 607 533 022) and has been prepared without taking into account your objectives, financial situation or needs. Before acting on such information, you should conduct your own review or consult a financial advisor before making a decision to invest. Please read the relevant Product Disclosure Statement and any associated reference documents before making an investment decision. In accordance with the Design and Distributions Obligations, we maintain Target Market Determinations for our Funds. All documents can be found on the Raiz website www.raizinvest.com.au, or calling the Customer Support team on 1300 754 748. Please note that past performance is not a reliable indicator or guarantee of future performance. Historical returns, forecasts, and market commentary are provided for general informational purposes only. All investment carries risk and may result in loss of capital.
