Harness the power of compound interest — what Albert Einstein reportedly called "the greatest power in the universe"...

If you saved 15 percent of your salary from age 25, only a third of the benefit you receive at retirement comes from your contributions. The rest is from compounding growth. There would be no wealth creation without compound interest.

However, like any powerful force, compound interest has the ability to both create and destroy. Compound interest also applies to debt which is why unpaid debts escalate at an ever-increasing rate and can soon become unmanageable. Harnessing the positive power of compound interest and avoiding the destructive effect of compound debt is the secret to creating wealth.

Compounding investment growth

Compound interest is the effect of earning interest upon interest. The table below shows the effect of an eight percent return per year, compounded monthly, on a R1000 lump sum:

The original investment has grown to R2220. Compound interest has just delivered R1220 that you have not had to work for.

Compound growth is even greater when you invest in growth assets like equities which, over time, provide higher returns than cash.

Based on the returns of the JSE over the last ten years a R1000 investment would now be worth R3500. That is R2500 created by the powerful force of compound growth.

Compounding debt

Compound interest works against you when you take on debt. Interest on debt is always higher than that on a money market investment because that is how banks generate profit. Banks also charge a risk premium for lending money.

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