The magic of compound interest
This is how big corporate companies, banks and wealthy people make their money: they let their money work for them by earning interest on interest. Otherwise known as ‘compound interest’. The illustration below gives you an idea of how effective this is.
If you were to pay yourself 1 cent today and double it each day for 31 days, what will you have at the end of the month?
The sooner you start, and the longer you stay in any investment, the better the results become over the longer term. It is like a snowball. It eventually runs away with itself. So, start saving NOW and don’t stop for anything. Set yourself goals and go for it.
Let’s look at another scenario. If you invested R100 000 today at 10% compounded interest, how much will it be worth after 31 years?
A whopping R2 200 000.
WHAT IS THIS WORTH IN TODAY’S TERMS?
If you consider your current buying power, R2 200 000 in today’s terms is worth approximately R350 000. Not much you can do with that, is there?
So let’s stay with the above scenario, but add an additional R1 000 per month (with an annual increase of 10%) to our R100 000 lump sum investment over the same period of 31 years.
The amount has increased to a staggering R9 500 000, worth R1 500 000 in today’s terms.
This will last you approximately 21 years if you drew a monthly salary of R10 000 per month, increasing at 5% annually with an interest rate of 10%.
THE COST OF RETIREMENT
It is expensive to retire. Only 6% of the world’s population gets it right to live comfortably after retirement. The remaining 94% struggle to survive and have to depend on family, friends and the state for financial help. Which part of the statistics do you want to belong to?
Get in touch with one of our Certified Financial Planners® to make sure you retire right.
June 3, 2016
Grant van Zyl