Real Estate Investor Magazine South Africa September 2014 | Page 36

FINANCES

BY YVETTE FOURIE

The Compound Interest Factor
How to save millions

Option 1

If you were given the two options on the right,
which one would you choose?

Get R10,000 every month for
the next 10 years

Do the math
Most people opt for R10,000 per month for 10 years! That is
because most people don’t do the math and don’t appreciate
the power of compound interest.
Let’s do the math.

Option 2

Option 1

Starting with 1 cent today,
get the money doubled every
day for 30 days

R10,000 x 12 months x 10
years = R1,200,000

0PTION 2
DAY

AMOUNT

1
2
3
4
5
6
7
8

R 0.01
R 0.02
R 0.04
R 0.08
R 0.16
R 0.32
R 0.64
R 1.28

DAY
9
10
11
12
13
14
15
16

AMOUNT
R 2.56
R 5.12
R 10.24
R 20.48
R 40.96
R 81.92
R 163.84
R 327.68

The 8th wonder of the world
Option 2 vividly demonstrates the power of compound
interest, which Albert Einstein called “the 8th wonder
of the world”. Unfortunately, very few understand this
power of compound interest.
The snowballing effect of compound interest is a topic
widely discussed in investment circles. You have probably
heard about the massive impact compound interest has
on a savings plan and that with a little time, the power of
compounding interest can literally move you to the right
end of the wealth scale.
Using the power of compound interest to your advantage
creates wealth rapidly, as Option 2 demonstrated.
Against the grain
But when the power of compound interest works against
you, for example, when it is applied to interest payable on
a loan, it can very quickly land you in financial trouble. In
a short period of time, interest on debt, and particularly
interest charged on unpaid interest on debt, can quickly
snowball into a huge financial problem.
36

September 2014 SA Real Estate Investor

DAY
17
18
19
20
21
22
23
24

AMOUNT
R 655.36
R 1 310.72
R 2 621.44
R 5 242.88
R 10 485.76
R 20 971.52
R 41 943.04
R 83 886.08

DAY
25
26
27
28
29
30

AMOUNT
R 167 772.16
R 335 544.32
R 671 088.64
R 1 342 177.28
R 2 684 354.56
R 5 368 709.12

For example, if you purchase a house of R1 million with
a bond at 10% interest over 20 years, you will actually end
up paying the bank R2,316,050. As a result of the effect
of compound interest, the total interest you will pay is
R1,316,050 - which means you end up paying more than
double the original amount of R1 million borrowed.
Make it work for you
Fortunately, even when it comes to interest on debt, using
the principle of compound interest correctly can save you
thousands of rands.
For example, you can pay off your bond in less than
10 years by simply changing a few habits. And we don’t
mean simply paying more into your bondas that can offer
strainyour cash flow. To find out fow much you can save
by implementing out strategies, access the mortgage
Defltor at www. mortgagerecovery.co.za

RESOURCES
CAPINT (PTY) LTD
www.reimag.co.za