Compound interest can be described as your money's best friend. Why? Compound interest means that over time you get interest on the money you save, and then you get interest on the interest, and so on. Not only does your money grow, but the interest grows too; you get interest on interest. If this sounds confusing, take a look at this example of compound interest at work.
See Mike turn R500 into R22 630!
Mike has R500 that he wants to save. His brother says not to trust financial institutes and hide it under the mattress. His family suggests that he saves it in the family savings group to earn some interest. Mike speaks to his financial adviser and learns about the power of compound interest. He's excited about it and decides to invest his money with a financial institute. Let's see how his R500 grows:
- Mike’s single investment of R500, shown in dark blue.
- The 10% growth he gets each year called interest, shown in light blue.
- The interest he gets on the interest, known as compound interest, shown in green.
But what if he saved under the mattress?
He would still have R500 at the end of 40 years (as long as it was not stolen or lost in a fire).
What if he saved with his relative?
If his relative matched the 10% growth each year (the interest) then at the end of 40 years he would only have R2 500 because his relative would not give him compound interest. Interest alone will only add R2 000 to his savings.
Mike saved with a financial institute
With a financial institute, Mike benefited by 10% interest adding R2 000 to his initial R500 investment, as well as compound interest adding an extra R20 130 to his savings. By investing wisely and leaving his investment to grow over 40 years, Mike’s single amount of R500 grew to a whopping R22 630.
You don't need a lot to make a lot
You can see the more time money has to grow, the more the interest compounds. You don’t need a lot of money if you want to save, you just need as much as you can afford and then time for it to grow.
You don’t have to do anything. Just sit back and let your money work for you. This is what makes time and compound interest your money’s best friends.
Note: The above mentioned examples are for illustrative purposes only and is not intended as advice or recommendation.