When you save your hard earned rands, and especially once your savings start to grow, you’ll have the benefit of regular interest being paid into your account.
The interest you receive will depend on what type of savings account you have. But one thing’s for sure, as your savings start to grow, so will the interest paid on them.
But – whatever you do – do not touch that interest
! Leave it well alone.
Let your savings flourish with the snowball effect of compounding
Simply put, compounding is when the interest you earn on your savings is reinvested so the interest also generates its own earnings, explains the team of experts at The South African Investor
Let’s see how compounding works with the help of a simple example…
In a year’s time, you’re going on a trip of a lifetime. You want to make sure you have a nice wad to take as spending money, so you tighten your belt and put away R4,000 of your salary every month.
You put the money into a savings account that pays 12% per annum in interest.
Over 12 months, if you don’t touch your savings or the interest generated from your savings, you’ll have a grand total of R51,237.31 in your savings account.
In comparison, if you’d put the money under the mattress or took the interest payments out of your savings account, you would only have R48,000.
Amazingly, by leaving the interest to earn interest too, you earn yourself a ‘free’ R3,237 a month in just a year! That’s nearly a whole month’s savings. That’s the miracle of compounding!
The sooner you start putting money away, the sooner your savings will start to snowball. And the larger they get, the quicker they grow.
Regular savings should form a vital part of your investment portfolio so you can grow your money exponentially through compounding.