Bank Better, Live Better

compound interest: why time is literally money

Compound interest is what makes money grow. When you save money it can work for you and when you borrow money it can work against you. A thorough understanding of the concept is an essential tool for your financial toolbox.

Let your money make money

When you save, you earn *interest on your savings. The higher the interest rate, the more interest you earn. Over time, you will keep earning interest on your original savings and, if you don’t withdraw the interest, you will start to earn interest on the interest you’ve just earned. This is known as compounding.

The growth may not seem like much at first but, given enough time, these repeated cycles of growth on growth make incredible things happen. Like a snowball getting exponentially bigger and faster with every roll, so your savings can grow in astonishing ways. The longer you can leave your savings, the bigger they will grow and the larger the jumps in growth become (because of how much interest is now working for you to earn more interest). Never think you have too little to bother saving. Every rand is worth far more than you realise.Actual interest rates will vary depending on the account you save in, your opening balance, the time you invest for and the interest rates available at the time. The more frequently your interest is compounded, the faster it will grow. The same compounding principle can be applied to growth on other investments over the long term (though the growth may not come in the form of interest).

Compound interest and debt 

When you borrow money, you pay interest in exchange for the benefit of using credit. The interest charged on debt is usually higher than the interest you earn when you save. As a result, debt can compound more quickly than savings, which can make it very expensive over time. It is critical to understand this when we decide how and why to use credit.If you are currently repaying debt, use the power of compounding to help you repay your debt quickly.

*Interest is simply a fee. You can either pay interest in return for the benefit of borrowing money, or earn interest in return for depositing money with a bank or financial institution.

Financial health guide

Was this article helpful?

you may also like...

View All Other Articles View All
SMART financial goals for 2020 and beyond

SMART financial goals for 2020 and beyond

Life is busy and it’s expensive. Much of the time, you’re likely thinking about the many immediate demands on your income. But to build your financial health, it’s essential to think about what you want your money to do for you in the future.

Read More
What is financial health?

What is financial health?

You probably have a general idea of what it means to have a healthy body. So what’s the equivalent for your bank balance?

Read More
the one question you need to answer before spending big on education

the one question you need to answer before spending big on education

You’re keen to further your chances of success and make an investment in your career. But before you go into debt for your education, you should be able to confidently answer this one question: Will your study plans further your long-term goals?

Read More
capitec launches innovative mobile game

capitec launches innovative mobile game

Ready to test your money skills by playing a mobile game? Livin’ it Up, Capitec’s new mobile game, will sharpen your financial skills in a virtual world, while you can pick up money tips for real life.

Read More
View All Other Articles