The power of compound interest

People always say there is no such thing as a free lunch, but in investments there are two:

  • the power of compound interest; and
  • the benefits of diversification.


Compound interest is the central pillar of investment. It is why investment grows so well over the long term. Look at it this way: if you save R10 000 at a return of 6% and withdraw nothing, you start the second year with R10 600 and you earn interest on both your original R10 000 and on the interest earned in the previous year. In short, you earn more interest each year because your investment amount increases every year even though you do not make any additional investments. The compound interest gained on the initial amount of R10 000 may not seem significant, but when applied to larger figures the effect is substantial.

A good way to accumulate savings, is to sign a monthly debit order towards an investment when you start your first job. That way you become used to not having the money available to spend on other things. Even if you are already in your 30’s or 40’s, it is never too late to start saving for your retirement, but the younger you are when you start, the more you stand to benefit from compound interest and the less money you need to put away each month, compared to somebody starting to save in later years. It is all about allowing time for compound interest to make your money grow.

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