Thandi Ngwane, Head of Strategic Markets, Allan Gray
In this month’s print issue of True Love we looked at the importance of time when saving and investing. The reason time is important is because of the power of compounding. Often called the “eighth wonder of the world”, compounding can dramatically multiply the value of your investment over time. It can be seen as one of the key ingredients to successful investing. To truly benefit from compounding, you need to adopt a long-term approach to saving, to give your money the best chance to grow.
The table below shows how compounding works, if you make a once-off R10 000 investment, earn returns of 10%, compounded annually, and re-invest your returns each year.
|Amount of your investment||Return rate (Interest earned)||Total amount with interest earned|
|Year one||R10 000||10% annually = R1000||R11 000|
|Year two||R11 000||10% annually = R1100||R12 100|
|Year three||R12 100||10% annually = R1210||R13 310|
After 20 years the total value of your investment would be R67 275, with R10 000 being your original cash and the rest being the return you’ve earned. If you hadn’t re-invested your returns, if you had spent them instead, the total value of your investment would only be R30 000, of which you’ll have already spent R20 000!
Of course, in order to benefit from compounding, you first have to start saving and you have to be disciplined and not spend the money your investment makes before reaching your savings goal. For example, if you are saving for retirement, it is imperative to leave your money invested until you actually retire.
Start as early as possible
The earlier you start saving, the longer compounding has to work its magic.
Your first 10 years of contributions are more important than your last 10 years as the money has that much more time to grow.
If you start early and save consistently over long periods, less of your total investment will be from your contributions and more from growth. In other words, using compounding to your advantage over time will mean you’ll have more money saved than the money you physically contributed.
There are various investment products out there that you can use for saving and you can learn more about these different options by visiting www.allangray.co.za/investingexplained/
Do you have any investment-related topics you would like to learn more about? Send an email to firstname.lastname@example.org and we’ll do our best to address popular themes in this column.
Allan Gray Proprietary Limited is an authorised financial services provider.