The amazing power of compounding

Compounding is when your savings generate additional earnings for you over a period of time. Huh??

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Simply put, compounding is the growth of your savings.

This growth is the interest earned on the amount saved; each month you earn interest on the initial amount plus the interest already earned (your money increases over time with very little action required from you).

Compounding in action:

Let's say I save R1200 on 1 Jan, the bank offers me an interest rate of 6% per annum. A simple interest calculation tells me that I will have R1272 at the end of the year. But come 31 Dec I will actually have R1274.01

This is because the interest earned this month earns interest the following month. Your money makes money babies and those babies make more money babies and so the process goes.

How does the calculation change if I save R100 each month for 12 months rather than saving the R1200 upfront

I save R100 per month each month for 12 months, I earn a 6% interest rate, at the end of the period I’ll have R1239.72. That's a difference of R34.29.

The difference is due to the fact that in the first example (R1200 lump sum saved) the money had a longer time to grow. This is the power of compounding. It's not necessarily about how much money you have but how long you can leave that money and allow it to grow.

There are many useful online resources and apps to help you calculate the future value of your savings.

Remember that the longer the term the better the interest rate offered by the bank.

https://www.ratecompare.co.za  Has a great interest rate comparison tool and calculator.

You can also use https://financialmentor.com/calculator/compound-interest-calculator to calculate compound interest.

The compound interest formula:

“Compound interest is earning interest on top of interest. It's a mathematical explosion .” Chris Hogan.