If you’re an investor, you’ve got a secret weapon. We’re talking about compound interest, and yes, compound interest is that powerful. Even Albert Einstein said that “Compound interest is the eighth wonder of the world.” But I must say, our forefathers knew about compounding centuries ago before Albert Einstein made it famous. They mastered this concept by managing and controlling the reproduction rate of cattle.
What is compound interest?
Compound interest refers to both the interest you earn on the money you’ve saved or invested, but also the interest you’ve earned on your interest. It’s your money making more money. It’s one of the best ways for you to put your money to work overtime.
If you let your money sit in cash under your mattress, your money can’t earn more money through compound interest. The sooner you put your money to work by investing it, the more you can expect to have later down the road. While there are other ways to put your money to work for you, we’re talking about compound interest in reference to investing, because investing is one of the most powerful things you can do to build wealth for the long-term. Keeping your money in an interest-bearing cash account, like a money market account, can make sense for the short-term financial goals you have. However, if you have a long-term financial goal, like financial security, then investing your cash is usually the way to go.
Here’s how compound interest works to make you richer
Let’s assume you put away R10, 000 at the beginning of every year for 10 years and you earn 10%. After 10 years, your investment would have grown to R175, 312 – a gain of R75, 312. This great concept can also work against you when you borrow money; Mashonisa’s lead the pack in this case.
The highlighted section below shows how interest on interest works over time.
|Year||Amount of your investment||Investment Return||Balance at the end|
|1||R10, 000||10% return is = R1,000||R11,000|
|2||R11, 000||10% return is = R1,100||R12,100|
|3||R12,100||10% return is = R1,210||R13,310|
Time is compound interest’s best friend
Time is the biggest key to compound interest. The more time you have to save and invest, the more money you can expect to make on your money. Your money can grow exponentially.
Young people have a huge advantage because time is on their side. This is why you’ll frequently hear financial advisors say that “The best time to start investing is now.” The interest you’ll earn initially is relatively small, but as time goes on, it becomes much bigger. The largest increases in value usually take place in the later years – that’s why patience is important when investing. In the above example, over 33% of the added value takes place in the last 5 of the 47 years.
You know Warren Buffett, one of the richest guys in the world? The vast majority of his net wealth has come in the very latest years of his life. It took him roughly 56 years to build a net worth of $1 billion. It took him only 27 years after that to turn that $1 billion into nearly $60 billion—and for that, he largely has compound interest to thank.
The sooner you start putting your money to work, the more time you have for compound interest to work in your favor. No matter your age, you can start making your money work for you and see the eighth wonder of the world for yourself.
Please contact our Client Service Centre or your wealth manager on 087 160 0017/8 or email email@example.com with any questions regarding your investment.
Head of Investments
Sphelele joined Inkunzi Wealth Group in 2013 and has 9 years’ experience in the investment management industry, having had previously worked for Allan Gray and Regarding Capital Management. Apart from being an active member of our investment team, Sphelele is also responsible for the management of our business. He holds a BCom degree in Economics from the University of Pretoria.