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Saving: The Magic of Compound Interest

Provided by the International Finance Corporation


Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest.  In short, you make money from your money.  Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount.  In fact, Albert Einstein once was purported to have stated,“The most powerful force in the universe is compound interest.”  The below three examples will illustrated the power of compound interest.

Example #1

By instilling the saving habit early in life, even the goal of becoming a millionaire by the age of sixty-five can be reached. By starting at the age of twenty and saving R95 per month, you can end up with a million Rands by the age of sixty-five, assuming a 10 percent return on the money (tax deferred). This is also assuming that none of the money will be withdrawn during the waiting period.

This goal also can be reached if you wait until you are older to start saving, but the amount you must contribute monthly increases dramatically the longer you wait. For example, if you wait until you are thirty years old, you will need to save R263 a month. If you wait until you are forty years old, you will need to save R754 a month, and if you wait until you are fifty years old, you will need to save R2,413 a month.  The below chart also shows how you can reach the R1 million goal by age 65 if you prefer to make a one-time investment, monthly investment or annual investment at various ages.

Age

One-time Investment

Monthly Investment

Annual Investment

20

R13,719

R95

R1,391

25

R22,095

R158

R2,259

30

R35,584

R263

R3,690

35

R57,309

R442

R6,079

40

R92,296

R754

R10,168

45

R148,644

R1,317

R17,460

50

R239,392

R2,413

R31,474

55

R385,543

R4,882

R62,745

60

R620,921

R12,914

R163,797

Example #2

This table illustrates the value over time of R1,000 invested annually (only R84 a month):

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

R5,526

R12,578

R21,579

R33,066

6%

R5,637

R13,181

R23,276

R36,786

7%

R5,751

R13,816

R25,129

R40,995

8%

R5,867

R14,487

R27,152

R45,762

9%

R5,985

R15,193

R29,361

R51,160

10%

R6,105

R15,937

R31,772

R57,275

11%

R6,228

R16,722

R34,405

R64,203

12%

R6,353

R17,549

R37,280

R72,052

Example #3

Investing R10,000 in a one-time lump sum also pays off:

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

R12,763

R16,289

R20,789

R26,533

6%

R13,382

R17,908

R23,966

R32,071

7%

R14,026

R19,672

R27,590

R38,697

8%

R14,693

R21,589

R31,722

R46,610

9%

R15,386

R23,674

R36,425

R56,044

10%

R16,105

R25,937

R41,772

R67,275

11%

R16,851

R28,394

R47,772

R80,623

12%

R17,623

R31,058

R54,736

R96,463

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