Did you know that when investing, your money is working for you through a simple concept called compounding growth?
Compounding simply means making money on your original investment as well as on the gains made in following years: i.e. growth on growth over time, notes Old Mutual.
“In short, as your money makes money, so it should make more, a relatively simple concept that, over time, is hugely beneficial.”
If you leave your investment for a long period of time, the investment not only grows each year, but grows exponentially. This interest is called compound interest, and is the key to long-term growth and wealth.
Saving without interest
If you saved R1,000 every year for 10 years, and kept your savings under your mattress, your money wouldn’t earn any interest. After 10 years it would be worth:
- R1 000 x 10 years = R10 000
If you had saved it in an investment that earned 10% interest per year, it would be worth more than R17,500, this is because the interest is compounded, causing the investment to grow much faster.
The power of compound interest
The graph shows three investors who each invested R500 a month until they were 65, but started at different times.
“Notice the difference in contributions as the late investor must contribute far more for the same growth,” Old Mutual said.
To ensure a fair comparison the financial services company assumed that their investments all grew at the same rate of 8% a year.