Why you have to embrace compounding with your savings and let it work its magic

by , 27 October 2015

Managing your monthly income can be a difficult task. There are so many expenses and bills to pay.

But you have to allocate a certain amount of money to put into savings so that you can start to build a nest egg.

Having savings in the bank gives you financial security. And importantly, it means you can let compounding work.

Let's take a closer look…


What are your financial priorities?


Ideally, you should put a portion of your income away each month into savings. If you have a lot of debt, your focus should be to pay this off first, then you can start pouring money into your savings.

The key to saving successfully is to let compounding work over time.

Compounding is when the money you have in the bank earns interest. If you don’t withdraw this interest, you’ll start to earn interest on your interest and the principal amount.

This snowballs your money over the years, growing your savings at an increasingly faster rate.

You never want to interrupt this process.

The thing is, by putting a regular amount into your savings at the best rate you can find, you’ll see your money grow.


How compounding works


For example, if you put R1,000 into your savings account each month at an interest rate of 10%, in five years, your savings will grow to R82,197. That’s from depositing R61,000.

Leave it for ten years, and your savings will grow to R212,967, from depositing R121,000.

In 20 years’ time, your savings will grow to R762,767, from depositing R241,000.

As you can see, the longer you leave your money in the bank and keep adding to it, the bigger the effect compounding has.

So there you have it. Why you have to embrace compounding with your savings and let it work its magic.

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