Your money is an asset and it should work hard for you in the same way you work hard to earn it. That might sound very general, so to break down the goal of what you are trying to achieve, here are three components to consider when putting your money to work in any investment:
• Try to get as much money as you can to work as fast as possible
• Earn the highest rate you can on your funds
• Understand and avoid the costs associated with your funds such as fees and interest costs.

REVERSING THE CYCLE
One of the many benefits of having money is that others will pay you for the use of it. In the same way you pay financial institutions for the credit they provide to you. This benefit is called interest and it is how they make money by providing you with the use of their money at a higher rate than what they are paying for it.

THE SORCERY OF COMPOUND INTEREST
Compound interest is one of the wonders of the financial world. Very simply, compound interest is just interest on interest. You invest R100 in an investment account which earns 5% interest per annum compounded yearly. The 5% interest per annum refers to the amount of “benefit” you will earn. Compounded yearly refers to when the interest will be added to your balance and begin earning interest. In this scenario you earn 5% per annum compounded yearly. Simply put, this means that every year you will earn 5% of your balance.
Below is a simple table displaying the compounding effect

Year Balance Interest Closing balance
Year 1 R 100.00 R 5.00 R 105.00
Year 2 R 105.00 R 5.25 R 110.25
Year 3 R 110.25 R 5.51 R 115.76
Year 4 R 115.76 R 5.79 R 121.55
Year 5 R 121.55 R 6.08 R 127.63

You can clearly see from the above the increase in interest from R5 in year one to R6.08 in year five. The “sorcery” behind this is you are earning interest on funds which previously were never yours. You may understand how compounding works, but the truth is millions of South Africans don’t take advantage of this simple wealth generation tool built into our financial world.

In our example above we used 5% as an interest rate purely for demonstration purposes but to truly grasp the power of compounding interest we need to look at the “Rule of 72”. The Rule of 72 is an easy way to estimate relatively accurately the impact of different interest rates over different periods of time. The thing to remember is that money doubles when the interest rate times the number of years equals 72.
• Money doubles in 6 years at 12% (6 multiplied by 12 = 72)
• Money doubles in 12 years at 6% (12 multiplied by 6 = 72)
• Money doubles in 8 years at 9% (8 multiplied by 6 = 72)
• Money doubles in 9 years at 8% (you get the picture)

In our example, a 5% interest earning investment would double in value from R100 to R200 in just over fourteen years. It may seem like a long wait, but when was the last time you doubled your money by simply putting into a different account?
THREE SIMPLE IDEAS TO GET YOUR MONEY TO WORK

• Don’t leave excess cash in your current account, put it to work in an interest earning account as quickly as you can
• Keep track of your expenses and rather tighten your budget and put your money to work
• Keep up to date with your financial institutions offerings as they will provide you with specials which earn high interest rates.

Scott Singleton CA (SA)
Executive Director
Inaura

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