By Karen Abbot, Principal, FinSec Planners

Albert Einstein once stated that the most powerful force in the world is Compound Interest. You don’t have to be a brilliant award-winning scientist with a bad hair day to appreciate the amazing power of this simple financial principle.

Given the RBA announced a significant interest rate change this month (0.5% reduction, if you’ve been hiding under a rock), I thought it’s a good time to explore three concepts related to interest rates and loans.

1.    Compounding interest
2.    Leverage
3.    Time

1.    Compound Interest

Compound Interest is the process of earning interest income on your interest income, which results in your money growing at an ever-accelerating rate.

Compound interest also assumes that we leave the interest in the account, and let it accumulate over a long period of time.

Take an initial amount of $10,000. You invest it in a term deposit, high yielding cash account or other investment paying interest of 6% p.a.  In the first year you’ll earn $600 interest.  In the second year, we start with a balance of $10,600 (your initial $10,00 plus the $600 interest), and you earn 6% on that balance – interest of $636.  $36 in additional interest does not seem like much, until we consider that the following year the interest on the new balance will be $74, the following year $115, and so on, we see that your money is growing exponentially.

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We look at some of the best destinations to get the most ‘bang for your buck’.

Most of us have returned to work and are reflecting dreamily on the relaxation and holiday time we enjoyed over the festive season. But with the continued strengthening of the Australian dollar you can take heart. That next holiday may be closer than you think.
A MasterCard survey conducted in 2011 on consumer purchasing priorities related to travel, highlighted the effect of the continuing strength of the Australian dollar in influencing our decision to travel overseas. 25% of respondents stated that they would not have made plans to travel overseas in 2011 if the exchange rate was not as favourable.

The same survey indicates that the strong Australian dollar could continue to impact our travel plans over the next 12 months – with almost a third (32%) of survey respondents intent on traveling more frequently for leisure purposes in 2012.

Whilst it is still early days in 2012, the exchange rate continues to be favourable with the Australian dollar strong against the US dollar, the British pound and the Euro. In the past three years, the Australian dollar has strengthened by 62 per cent against the euro, up from a low of 49 euro cents in February 2009 (Herald Sun 7/1/2012). CommSec Chief Economist Craig James has been quoted this month as suggesting that the Australian dollar could spike as high as 84 euro cents.

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Thanks to finance.yahoo.com

Do you remember the days of the three-martini lunch (or as Jimmy Carter put it, the “the $50 martini lunch”)? Or a time when a lunch hour could actually take — an hour? Or even the standard half an hour?

Perhaps not. In a society that is increasingly work-obsessed and overly “connected,” the lunch break, for many, is not a “break” at all, but a sandwich or salad hastily consumed at our desks as we continue on with our workday. Last year, a survey by human resources consulting firm Right Management (an American Firm) found that “one-third of employees have lunch at their desk each day” and “another one-third takes no lunch, or only occasionally.”

“Lunch patterns allow us to infer a few things about the workplace…and one thing that we already know is that the pressure for productivity and performance can be relentless,” said Michael Haid, senior VP of talent management at Right Management, in a release on the study.

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This note looks at the various issues around Greece’s possible exit from the Eurozone.

Key points to note are:

• It is not a foregone conclusion Greece will leave the euro. Much depends on the outcome of its 17 June election.
• The cost of exit would be very high for Greece and Europe. In fact, it would be much cheaper for Europe to keep Greece in the Eurozone.
• Should Greece exit, the best way to minimise the cost to the rest of Europe would be to guarantee Eurozone bank deposits, recapitalise troubled banks and for the European Central Bank (ECB) to engage in aggressive monetary easing. Ultimately, Eurozone policy makers would be likely to do this if it came down to saving the euro.
• Australia is vulnerable via effects on China, confidence, bank funding and falling share market wealth.
• Risk assets are likely to remain volatile in the short term but attractive valuations and monetary easing are likely to see them higher by year end.To access a copy of the report click here.

Not all aspects of finance will ever apply to you but personal finance is something you have to deal with everyday–whether you think you are or not. It’s important that you know some personal finance basics so you understand what’s going on with your money. Here are seven very basic terms that everyone should know:

Net Worth

Your personal net worth is the difference between your assets and debt. A positive net worth means you have more cash flow from your resources than liabilities. A negative net worth means you owe more than you bring in.

Asset
An asset is a resource that has economic value. Assets increase your net worth by generating cash flow. Your business is an asset because it brings in cash.

Liability

A liability is a debt or monetary obligation you have. While owning property is an asset, a mortgage is a liability because you must pay it every month.

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