Here's why you should make compound interest your new best friend

Why shouldn't I withdraw my returns early if I can help it?

It might be tempting to withdraw the returns you've earned on your investment, but it's much more beneficial to reinvest those returns instead. By reinvesting your returns, you start to earn returns on your returns, allowing it to compound - that is, grow exponentially over time.

In essence, simply by leaving your returns untouched to grow, your money can work a lot harder for you without any extra effort from you.

How does time affect the interest I earn?

Compound interest works best with larger sums of money and with sums that have been invested for longer periods. Consider these examples to see how time affects the effectiveness of compound interest.

1. Case study 1: Xoliswa - At age 25, Xoliswa deposits a once off lump sum of R100,000 in a unit trust. The investment generates about 8% in returns each year. She doesn't withdraw the funds but just leaves compound interest to work. By the time she is 60 years old, her investment is worth R1.4 million.
2. Case study 2: Mark - Mark also deposits a once off lump sum of R100,000 in a unit trust that generates about 8% in returns each year. However, he only starts investing when he is 35 years old. By the time he's 60 years old, his investment is worth R684,000.

It's clear that, despite the same return rate to Mark's investment, Xoliswa's 10 year head start in accumulating compound interest has made an incredible difference to her wealth at retirement.

The sooner you start, the better

The case studies above make it clear: time has a huge impact on allowing compound interest to work its magic. The more time you have, the more you can benefit from compounding. So whether you're just starting out in your career or are already well established, the best time to start saving is as soon as possible!