Publish Date: 21/01/2020
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:
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.
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.
About African Bank
Our mission is to be a successful Retail Bank offering a wide range of products and services to the consumers of South Africa. The people who work for African Bank represent the diverse population of South Africa; therefore we are a reflection of you, of all South Africans. We seek to provide value - more than our consumers expect of us. We promise to live our purpose 'humanity through banking' in all that we do and we are confident that we can, because 'We are You'.