I recently had a query from a reader of another publication I write for who questioned how R60 000 could possibly grow to R2,3-million. He was sure my sums were incorrect. As a journalist you do worry that you may have had some finger trouble, but going over the figures carefully, the facts remain the same — Albert Einstein was correct: compounding interest is truly one of the wonders of the world.
In the original article, I had stated that if you invested R500 a month from age 25 to 35 years old and then stopped contributing, by the time you reached 60 (25 years later) it would be worth R2,3-million.
This is how the power of compounding works:
In this calculation we used a 12% return per year, which is what is expected from the markets over the longer-term.
After 10 years of contributions, the investment is worth R115 000 (R500 per month plus growth). At 12% the money doubles in value every 70 months (5 years and 10 months)
- So after 70 months it is worth R230 000 (115 000 x 2)
- A further 70 months = R460 000 (230 000 x 2)
- A further 70 months = R920 000 (R460 000 x 2)
- A further 70 months = R1,8-million (920 000 x 2)
- A final 20 months invested = R2,2-million
(The slight difference is that it doubles just under 70 months so there is a bit of extra growth)
For every five years and 10 months longer that you have that money invested it doubles — so the difference between investing for 20 years and 25 years becomes significant. Now you can understand why the earlier you start saving the more money you will have invested — it is not just the money you save but the growth on that money.
But also remember that this amount does not take inflation into account so it is not R2,3-million in today’s buying value. By that time R2,3-million would buy you the same basket of goods that R658 000 would buy you today, assuming inflation is around 5%. But even so, just by starting to save early you can grow R60 000 to R658 000 in today’s value.
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