This post isn’t anything overly complicated, but I have been chatting to a lot of people recently about saving and sometimes it has more effect when you see actual results. So I went ahead and run some permutations through a compound interest calculator to show you just what’s possible if you can afford a few hundred rand a month.
Before we start looking at numbers, let’s look at the foundation behind this research. I’ve based these calculations on a somewhat conservative 12% return, which is what the Satrix 40 currently sits at for the last 12 months (11.89% to be precise). I chose the Satrix 40 because it’s an account that takes literally a few minutes to sign up for online (no affiliate) and it’s something I did towards the end of last year so it’s fresh in my mind.
Note: At the time of writing this post, there’s a dip in the graph which leads it to 11.89% – if this post was written literally a month ago, the interest would be closer to 18/19% or so, as shown in this table from the article on the top performing EFT funds in South Africa:
Let’s look at some scenarios on how you could go about investing your R300 per month.
Investing R300 per month with no initial deposit for 20 years at 12% interest compounded monthly:
Investing R300 per month with an initial deposit of R10,000, for 20 years at 12% interest compounded monthly:
You can see the massive change for having an initial deposit – this right here is the beauty of compound interest when starting from a decent foundation.
Investing R300 per month with no initial deposit for 20 years at 12% interest compounded monthly AND increasing your monthly payments by 10% per year.
Another great example of what happens if you increase your yearly payments by 10% – In other words, instead of paying R300 per month you’ll now pay R330. In the third year your monthly payments would be R363.
Investing R300 per month with a R10,000 deposit for 20 years at 12% interest compounded monthly AND increasing monthly payments by 10% per year.
Finally, by including an initial deposit along with a yearly increase of 10% you can really start to see how compound interest can work in your favour.
The 10% increase per year is to effectively combat inflation, because as inflation rises so does the expense of living. I’d always recommend (although I’m not an advisor!) to increase your monthly instalments by the rate of inflation each year or chances are you’ll arrive at the end of the investment term and be disappointed with the growth – I’ve seen this happen to people.
I think another important thing to remember with these calculations is that they’re over 20 years only – if you start young enough you could extend this by double the term and your growth would be quite massive in relation. I’m aged 31 and I took out a Satrix 40 account last year – I’d probably want to run it until I’m 60 (retirement age?) or so, which is 30 years not 20 for example.
If I’ve learnt anything over the past couple of years it’s the sooner the better – although obvious and although the premise behind compound interest, it’s often not understood and people miss the boat.
Let’s look at one more scenario for those who are in a position to invest more:
Investing R1,000 per month with a R100,000 deposit for 30 years at 18% interest compounded monthly and increasing the monthly payments by 10% per year.
BOOM! Before you buy that fancy car, take a look at the numbers above. Buy a fancier one in 30 years ;)
UPDATE: I’ve created a really simple Excel spreadsheet which does 10% interest on basic numbers that you can download here and play around with. This doesn’t include the increase per annun, but it’s towards to lower risk side of things and therefore gives you a baseline to work from.
UPDATE 2: I’ve written a reality check post on whether you monthly contribution is going to work for you.