A little bit goes a long way

I often hear in my travels and discussions with people that they don't earn enough money to save. The theme of these comments is that they need to be putting lots of money away to build up their savings pool.

Two simple things make the biggest difference when it comes to successful saving.

• A good habit and the power of compounding.

 You know what habits are, but what is the power of compounding?

• Well, the power of compounding - legend has it that Albert Einstein once described it as the eighth wonder of the world.

While I don't know if he did actually say it I can say it is so important that every child should have it tattooed to the inside of their eyelids so they don't forget it.

When you invest or save some money it earns interest. If you don't touch the interest, but let it add to your lump sum, then you start to earn interest on your interest, as well as on the original amount you saved. Over time this can make a significant difference to the total level of your savings.

The best example I use is my kids. Their pocket money is paid by automatic payment into an online savings account every week. They can't get access to this, but every month they get a statement showing how much money they have got and what the interest payment is. The kids are wrapped when they see that they have a few hundred extra dollars each year for doing nothing - except having a good savings habit.

Here are some numbers to show the point.

• If you had $5000 in an account and it earned interest of 7.35% then in less than 10 years, it would have doubled in size.

• Assuming you paid in an additional $20 a week over this nine-year period, you would end up with $23,044 of that $8,684 is interest.

And you think this is hard to do? No, it's not. Saving $20 a week is the equivalent of giving up one cup of coffee a day.

If that sounds good it gets even better if you start saving earlier and the power of compounding is increased if you can put down a bigger amount of money to start your savings.

If you want to play around with the power of compounding try the RaboPlus Savings Calculator.

Another basic way of working it out (roughly) is to use what's called "The Rule of 72". All you do is divide the interest rate into 72. The result tells you how long it will take for your money to double without further savings. So 72 divided by 7.35 shows you that your money would double 9 years and nine months if it was earning interest at 7.35%.

Remember, a small amount of money saved regularly can make a significant difference over time.