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.
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