Put your money to work with compound interest
When you take out a loan, there’s interest that you pay. And when you invest money at a bank, you earn interest on that investment. This shows that interest rates are at the centre of many financial decisions. How fast your investment grows is determined largely by the interest rate - the higher the interest rate, the better your return on investment.
The goal of interest is to grow your money. So making sure you’re getting the best interest rates on investments will help you achieve that goal. The magic is in compound interest, and we show you why it’s the best way to invest money.
Compound interest defined
Compound interest, also known as "interest on interest," is defined as the interest that you earn on the amount you have invested, as well as the interest you earn on that interest earned.
How compound interest works
When you invest money, you earn interest on that investment. What compound interest does, is to help you also earn interest on the interest you’ve earned from your initial investment. For example, if you invest R100 with a bank, you will earn interest on that R100. And with compound interest, you will also earn interest on the interest you initially earned on the R100. This infographic explains compound interest in more detail.
What makes compound interest work better, in giving you the best return on investment, is time. This refers to how long you keep your money invested without withdrawing it from the account. The longer you leave your investment with the bank, the higher your returns will be. If you choose to leave your deposit and your interest until the maturity of your investment, the growth of your money will be even greater. This is also known as the Expiry Rate.
What affects compound interest?
Early withdrawals, as well as having your interest paid out to you before the maturity date, will affect how well compound interest can work for you. Here are terms to consider when choosing when you want your interest paid to you:
- Nominal Annual Compounded Monthly (NACM)
This is the actual interest that is earned over a one month period. If you choose to have your interest paid out to you every month, this is the rate that will be applied to work out the monthly interest payable on your investment.
- Nominal Annual Compounded Annually (NACA)
This refers to the annual effective interest rate that your investment will grow if you don’t withdraw the interest earned every month. It is the interest you will earn if you choose to withdraw interest after a year of investment.
- Expiry Rate
This is the interest rate that is used to calculate the interest earned on your investment if you leave your deposit invested until the maturity date. This means you don’t withdraw any of the interest until the agreed upon term of investment.
Investment option with compound interest
We currently offer a 10.75% rate for a fixed term deposit of 5 years. That is the Annual Compounding rate (NACA) that you will earn if you decide to have interest paid out each year.
- African Bank Fixed Deposit: With a minimum investment amount of R500 needed, you can earn SA’s best investment interest rate of 10.75% and choose whether or not you want your interest paid out monthly, every six months, every 12 months or on maturity.
Compound interest can help grow your savings a lot. In simple terms, it is interest on interest, and it can help you reach your financial goals right on time (if not sooner). So save the little you can and let compound interest do the rest of the work for you. The sooner your money starts earning money for you, the longer it will work.