The Million Rand Cappuccino (The Power of Compound Interest!)

This article is part of an ongoing series of basic financial education by financial industry professionals curated by PocketFin – The Financial School of Real Life. CNBC Africa provides PocketFin content as a service to its readers but does not edit the articles it publishes. CNBC Africa is not responsible for the content provided by PocketFin.

I guess you (like most people) enjoy frequent coffees on the go, on the way to work, on your lunch break or with friends, I mean that milk cappuccino can get us going and can be enjoyed easier than ever. As I’m sure you’ve also realized, the cost of our everyday guilty pleasure continues to rise with inflation as with most of our possessions each year.

We did an experiment and realized that this delicious daily purchase could cost you R1 million in retirement!

You see, with a lot of little daily pleasures that we usually don’t flinch at, we never feel guilty about those little purchases, but what if you decided to reduce that daily pleasure to twice a week instead of seven? Let’s work out R25 for a cup of coffee, and suppose you have one every day, making it a total of R150 per week. R150 per week multiplied by 4 weeks equals a whopping R600 per month! This amount is usually double the minimum recurring investment amount per month at most financial institutions.

We don’t realize how often these small purchases add up because they seem just that, small! But what we wanted to experiment with was how such a simple expense could mean literally a million rands more in retirement for just cutting 5 out of the 7 coffees you drink each week. You may be thinking… there is no way I am giving up my daily coffee or how would it be worth a million rand but let’s think and do some real math to see how much more wealth we could accumulate on the long term !

If you were to use the example above and save R600 per month for 25 years with an annual increase of 5%, assuming you are invested and receiving a return of 10% per year, the amount of your capital at the end would be a staggering R1,129,813.84.

See, it’s not about saving that money, it’s about allowing the power of compound interest to work in your favor.

Interest isn’t the most appealing topic because so many people immediately think of debt! But having a good understanding of what compound interest is and how it can increase your wealth is something we think everyone needs to know: it’s about looking after your financial future and it doesn’t. There’s no better time to start using compound interest than TODAY! Even the famous Albert Einstein believed that “compound interest is the eighth wonder of the world!”

Compound interest is basically interest on interest. You make an initial contribution into something like a mutual fund/trust account. You earn interest and it is added to your initial contribution. Then you start earning interest on your initial contribution and on the interest paid to you. The cycle continues and it becomes a continuous, compounding amount that increases dramatically over time!

We’d like to encourage you to try the Cappuccino Challenge or whatever your guilty pleasure is for the rest of this year, and see how much money you save not just, but by putting it into an interest-bearing investment, what it might be worth more time.

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