The Wonderful 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.

The best time to start was yesterday!

The famous Albert Einstein said: “compound interest is the eighth wonder of the world”! Why does starting to invest early mean so much more in retirement?

The foundation of compound interest is the concept of the time value of money, which states that the value of money changes depending on when it is received. Having for example R1000 today is better than receiving it in a year because you can invest it to generate dividends and interest income. Compound interest allows that money to grow.

Opportunity cost is the loss of possible gains if an action is not chosen – in this case, the amount of money you do not receive if you do not act on it or, as another example, decide to leave funds you don’t need in a savings account that doesn’t earn interest. If you didn’t invest the R1000, you lost the opportunity to earn interest that you could have earned. The example below from PocketFin’s course on long-term investing reflects the power of compound interest and how starting sooner rather than later can give you a dramatic head start.

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In the image above we can see that Debbie started saving at age 22 and stopped at age 27 and let her funds accumulate until age 60. Unfortunately for Dave, he didn’t start saving until he was 28 and has to save until he’s 60. and they both bother the same amount. Who would you rather be? We really want to be Debbie!

This is such a simple financial lesson and it can seriously make all the difference to you and everyone around you. Educating people about compound interest and encouraging them to start investing as early as possible ensures you reap the best results when it comes to compounding! When you understand the time value of money, you will see that compound interest and patience are the ingredients of wealth.

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