SOME SIMPLE INVESTMENT CALCULATIONS WITH COMPOUND INTEREST EXAMPLES


Investing & Money
piece written on the 4th February 2014 by  

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.

Satrix 40

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:

EFT Funds ZAR

Let’s look at some scenarios on how you could go about investing your R300 per month.

Scenario 1

Investing R300 per month with no initial deposit for 20 years at 12% interest compounded monthly:

Table 1

Scenario 2

Investing R300 per month with an initial deposit of R10,000, for 20 years at 12% interest compounded monthly:

Table 2

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.

Scenario 3

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.

Table 3

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.

Scenario 4

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.

Table 4

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:

Scenario 5

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.

table5

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.

  • James

    I just had to lol at scenario 5. How we all wish for a situation like that hey :P The other scenarios just show you how important it is to save and how early and diligent you actually have to be. Don’t wake up at 40 or even 30 and realize that you haven’t been saving for a rainy day, or even worse, for retirement!

  • http://www.imoddigital.com/ Christopher M

    Said like a champion, except for the part about waking up at 30, oi, nothing wrong with that ;)

    But all jokes aside, I wish there was more access to information like this because young adults leaving school should know about this and if they did, I think (in a number of years obviously) our economy would see quite a change. Less pressure on the youth to support parents, less credit being taken and just a general better life knowing that retirement can really be what it’s meant to be.

  • Adrian L Marnewick

    Instead of sex ed (yes, it is important I know) I wish we were taught things like this in Life Skills. And also the fact that smoking increases your premium for life insurance (not that I smoke, but still an interesting thing to know!).

  • http://www.imoddigital.com/ Christopher M

    Agreed, at the end of the day, a few important life lessons can go incredibly far. Teaching matric students the basics such as:

    1. Investment policies & compound interest
    2. How to get a bond and how the money works
    3. How to register a company and do basic tax

    The list goes on, but honestly, these topics shouldn’t take more than an hour and a well written document could be handed out too.

    Can’t quite understand why this doesn’t happen, perhaps it does at private schools?

  • http://wogan.me Wogan

    “Why not to take out loans” is another one we could all learn, lol. The marketing that sells them is fantastic – the cautionary tales, not so much :)

  • http://www.imoddigital.com/ Christopher M

    Good one to add to the list indeed! There are basically only 2 loans worth taking out in my opinion:

    1. A student loan,
    2. A home loan.

  • Maria Scarpello

    It doesn’t happen because the teachers do not know this for themselves to help teach this. I’m not sure of the teacher salaries down there but up here in the US they are very low comparatively across all industries and more importantly the value they provide. The best solution is to bring in a financial advisor to help teach this to kids but when you keep cutting school funding continuing education for the most valuable lessons such as money and the arts get neglected. :(

    Thank you for sharing your insights! Something to think about here for sure!

  • http://wogan.me Wogan

    It’s a simple rule: Only take out a loan if it can improve your financial situation in the long run – higher education and owning property are good examples :)

  • http://www.imoddigital.com/ Christopher M

    I think the education sector here would struggle to institute something like this into the syllabus, so your suggestion about getting a financial advisor isn’t a bad one. The only problem I have with financial advisors is that they (or at least the several I’ve dealt with) have their best interests in mind rather than ours (or the kids).

    Perhaps there’s a gap in the market for a student education portal that assists with all these topics and subjects!

  • http://www.imoddigital.com/ Christopher M

    Agreed, but with the car.. go for something less expensive regardless of how tempting something fancy is!

  • Hannes Truter

    Hi Chris

    Lovely stuff.

    Small typo in paragraph just above ‘Scenaro
    4′:

    “..instead of paying R300 per month you’ll now pay
    R330..”

    Keep up the good work.

  • http://www.imoddigital.com/ Christopher M

    @hannestruter:disqus Thank you very much for pointing that out, I saw the numbers in my head, but clearly my fingers had a different idea. Appreciate you letting me know. Hope to see you around here more often :)

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  • sidambe

    Great job Chris very informative. am 38 now, married, with almost two kids,wish i accesed information like this 20 years ago when i started working i could be far by now, but hey the good news is i’ve started investing and this means something great for my kids.when i started investing in satrx40 in 2012 i didnt understand adequately thanx for the detailed breakdown.quite true on taking subjects like these in our education system,coz most of us as the african race are more keen on saving for about R1000month on funeral policies death and stokvels, but people should know how capable they are out there.

  • http://www.imoddigital.com/ Christopher M

    @sidambe:disqus Ah yes, good old hindsight! But what you say is exactly how I feel, we need to be taught these things when we’re younger. But there are 2 optimistic ways to look at this though:

    1. You’re young, if you invest now you still have a good 20 years before “retirement” which is a great amount of time. Investors say, “the best time to start investing is now” and that’s exactly what you’re doing.

    2. You’ll be in a position to teach your kids from an early age so they do benefit from what you now know.

    Thank you for your kind words, have a look around my blog as I’ve written quite a few posts on this topic. Alternatively, you can subscribe to receive an email each time I write a new post – look at the top right of the website.

    Hope to see you around here more in the future :)