, y e n Mo
Saving money is smart. Saving money while earning interest is really smart. What’s interest? Well, when you put money in a bank account, the bank adds a little bonus amount to your account at set intervals – almost like a reward for saving. This extra cash is called interest. And for every interest-earning period you leave your money there, you earn interest on that interest. So your money makes you more money. This is known as compound interest. To see how compound interest works, you can use the following formula:
A = P[1+ (r/n)]nt A is the amount you have after interest payment, P is the amount you started with, n is the number of times per year interest is paid, t is the number of years invested, and r is the yearly interest rate (ie, the amount the bank pays in), expressed as a fraction. Because the amount you started with, P, is multiplied by a value larger than one ([1+ (r/n)]), you’ll end up with a bit more moola after the interest is paid. The new balance
y e n o m , y e n o m The maths of making more moola.
then becomes the starting value (P) for the next round of interest calculation. Although the interest rate stays the same, you’ll earn a bit more now, because the amount at the beginning of this round was slightly larger than that in the previous round.
Money for mahala Imagine you and a friend decide to save R100 each every month. Your friend stashes his savings in a piggy bank; you put yours in a bank account. The piggy bank offers 0% interest; the real bank offers you a yearly interest rate of 8% (that’s 8% of the total amount in your bank account). The interest is added to your account monthly, so you earn a twelfth of 8% interest every month. Over time, you and your friend save the following:
Year 1 Year 2 Year 3 Year 4 Year 5
R1 200,00 R2 400,00 R3 600,00 R4 800,00 R6 000,00
R1 253,29 R2 610,61 R4 080,58 R5 672,56 R7 396,67
By linda pretorius • PHOTOGRAPHS: istock photos
After five years, you’ll have almost R1 400 more than your friend – without putting a single extra cent in! Which is why it really pays to be smarter.
Work it out You inherit R10 000 from a long-lost aunt and you invest it in a bank for five years. The account earns 6% interest per year, but the interest is added to your balance each month. How much will you have after five years? Remember: 6% expressed as a fraction is 0,06. <Solution found on page 32> Double your money
Divide 72 by the interest rate to see approximately how long it’ll take to double your money. For example, if you earn 10% interest, your money should double in just over 7 years thanks to compound interest. This is known as the rule of 72.
Published on May 3, 2010