Bank Better, Live Better
save, compound interest will do the rest01/08/2019
Compound interest can make a big difference to your savings. We look at 2 examples of how it can impact your money.
Many billionaires, chief executive officers (CEOs) and other industry leaders are early risers who start their days before sunrise. Apple CEO Tim Cook, for instance, gets up just before 4am and reads comments from Apple users before working out.
It might sound tough, but like many good habits the hardest part is starting. Once you can do that, the rest follows.
In the same way, starting to save money can be a challenge for many people. It takes decisiveness and compromise. Instead of that extra chocolate at the grocery store or a night out having drinks, you would be saving. But starting to save early and consistently, even a small amount, can make your financial life infinitely better.
When you put your money in a savings plan, it earns interest. Compound interest is when your money earns interest on top of the interest you have already earned. This can mean that instead of having lazy money, your money actually works for you.
How waiting can cost you in savings
Minkateko and Raadiyah are best friends, both 24, who have a goal to retire at 65 with R1 million. Minkateko decides to start saving immediately by putting away R8 250 a year in a savings plan with an 8% interest rate.
By age 30, just 6 years later, Minkateko stops saving because the compound interest she will continue to earn on the R65 363 she has saved so far will, over the next 35 years, take her to her R1 million goal.
She visits her friend Raadiyah, who hasn’t started saving yet. This means she’s lost the added benefit of compound interest and has to now save R8 250 every year until the age of 41 before she can stop and rely on compound interest from thereon.
It means she will have to save for twice as long as her friend to reach the same goal. That’s 12 years in total and double the amount of money needed to put away.
|24||R8 250||R8 910|
|29||R8 250||R65 363|
|65||R0||R1 043 730|
*Minkateko saved R 8 250 a year for 6 years before letting compound interest do the work.
|30||R8 250||R8 910|
|41||R8 250||R169 086|
|65||R0||R1 072 206|
*Because she started saving later, Raadiyah had to save R8 250 a year for 12 years before she could let compound interest do the work.
An easy way to start saving today
Small expenses can become big expenses when you don’t keep an eye on them. If you track your daily spending for a week or even a month, you may be surprised by how your regular coffees and other expenses that you haven’t budgeted for, accumulates.
If your morning cappuccino costs R30, giving up 3 capuccinos per week starting today will save you R90 per week. That’s a minimum of R360 per month. If you put that into a piggy bank you’ll save over R4 000 in a year. However, if you put R360 a month in a Capitec flexible savings account every month, you could earn from R8 per month. That’s over R90 added to your savings account.
Now put that amount (plus your R360 per month) in a Capitec fixed-term savings plan for 2 years and you could end up with over R14 000. Your money could make more than R1 000 thanks to compound interest and buying 3 fewer coffees a week.
Start saving today
Which one of your goals do you want to get an early start on? Have your say on Twitter or Facebook using the hashtag #SayNoToLazyMoney.
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