Put quite simply ladies, compound interest allows a very average saver to become a wealthy individual.
How does compound interest work?
If you save R250 a month between the ages of 24 and 30, you will have accumulated more at age 65 than someone who saves the same amount monthly from age 35 to 65.
It works like this:
- If you put R250 away monthly between 24 and 30, and then leave those savings in your account, you’ll be worth R479,453 by age 65. This is based on an interest rate of nine percent (Van Heerde says this is calculated assuming six percent inflationary returns, plus five percent real returns, with two percent subtracted for fees).
- On the flip side, put away R250 between 35 and 65, you’ll only end up with R425,528. “The difference is in the extra amount of time that your savings have to earn interest or compound, starting at age 24 instead of 35,” she says.
Now that you know how compound interest works, find out how saving smart can secure your children's financial future, too.