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Financial Education

The R1 million cappuccino (The Power of Compound Interest!)

PUBLISHED: Tue, 09 Feb 2021 12:13:48 GMT

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 LifeCNBC 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.

Photo by Albert S on Unsplash

I am guessing that you (like most people) enjoy frequent coffee’s on the run, on the way to work, on your lunch break or with friends, I mean, that milky cappuccino can get us going and can be enjoyed more conveniently than ever. As I am sure you have also realized the cost of our daily guilty pleasure continues to rise with inflation as with most of our goods every year. 

We did an experiment and realized that this daily purchase albeit delicious could cost you R1 million at retirement!

You see, with many of the small daily pleasures that we usually don’t bat an eyelash at, we never feel guilty for these small purchases, but what if you decided to cut this daily pleasure down to say twice a week instead of seven. Let’s work on R25 for a cup of coffee, and let’s assume that you had one everyday making it a total of R150 a week. R150 a week multiplied by 4 weeks equals a whopping R600 a month! This amount is usually double what a minimum recurring investment amount is per month across most financial institutions.

We don’t realize how these small purchases often add up because they seem exactly that, small! But what we wanted to experiment with was just how much such a simple expense could mean literally a million rand more at retirement for just cutting out 5 of the 7 coffees you have weekly. You might be thinking… there is no way I would give up my daily coffee or how would that be worth a million rand but let’s consider and get down to real calculations to see just how much more wealth we could accumulate over the long run!

If you were to use the example above and save R600 a month for 25 years with an annual increase of 5%, assuming you are invested and are receiving a return of 10% per year, your capital amount at completion would be a staggering R 1,129,813.84

You see it’s not about saving that money but more so allowing the power of compound interest to work in your favour.

Interest isn’t the most attractive subject matter as so many people immediately think of debt! But having a good grasp on what compound interest is, and how it can boost your wealth, is something we think everyone needs to know: it’s looking out for your future financial self and there is no better time to start making use of compound interest than TODAY! Even the famous Albert Einstein believed that “compound interest is the eighth wonder of the world!”

Photo by Taton Moïse on Unsplash

Compound interest is basically interest on interest. You make an initial contribution into something like a mutual fund/unit trust account. You earn interest and it’s added to your initial contribution. Then, you start earning interest on both your initial contribution and the interest you’ve been paid. The cycle continues and this becomes an ongoing, compounding amount which dramatically grows over time!

We would like to encourage you to try the Cappuccino challenge or whatever your guilty pleasure might be for the remainder of this year, and see just how much money you not only save but by placing it into an interest bearing investment what that could be worth over time.

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