The marvellous power of compound interest

PUBLISHED: Wed, 03 Feb 2021 08:00:00 GMT
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This article is part of an ongoing series of basic financial education brought to you by financial industry professionals curated by PocketFin – The Financial School of Real Life.CNBC Africa provides content from PocketFin as a service to its readers but does not edit the articles it publishes. CNBC Africa is not responsible for the content provided by PocketFin.

The Best Time to Start Was Yesterday!

The famous Albert Einstein said: “compound interest is the eighth wonder of the world”! How does getting an early start to investing mean so much more at retirement? 

The foundation behind compounding interest is the concept of the time value of money, which states that the value of money changes depending upon when it is received. Having for example R1000 today is better than receiving it in a years’ time from now because you can invest it to generate dividends and interest income. Compounding interest allows that money to grow. 

Opportunity cost is the loss of possible gains if an action is not chosen—in this case, the amount of money you do not receive if you take no action with it or as another example decide to leave funds you do not need in a savings account that does not generate interest. If you did not invest the R1000, you have lost the opportunity to earn interest that you could have gained. The example below from PocketFin’s course on Long term investing reflects the power of compound interest and how starting sooner than later can give you such a dramatic head start. 

www.pocketfin.co.za

In the above image we can see that Debbie started saving at the age 22 and stopped at the age 27 and let her funds compound until age 60, unfortunately for Dave he only started saving at age 28 and has to save all the way until age 60 and they bother each the same amount. Who would you rather be? We definitely want to be Debbie! 

This is such a simple financial lesson and it can seriously make a world of difference to you and all those around you. Making people aware of compound interest and encouraging people to start investing from as young as possible ensures you reap the best results with regards to the compound effect! When you understand the time value of money, you’ll see that compound interest and patience are the ingredients for wealth.

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