Most of us have heard the term “the power of compounding.” And yes, it might seem as though the financial industry is stuck on repeat – but there’s a very good reason for that. Compounding is one of the most powerful forces in personal finance, and it can dramatically shape your long-term wealth story.
Here’s the simple truth: starting early, even with small amounts, can make a huge difference.
When you’re young and just beginning your career, investing is probably the last thing on your mind. Later in life, when you’re raising a family, paying off a bond, and trying to balance school fees, groceries and life’s little luxuries, saving often feels out of reach. The problem is, life doesn’t get cheaper as you go along – in fact, it only becomes more expensive. And there will always be something tempting you to spend rather than save.
This is exactly where compounding comes into play. Compounding means that your money not only earns a return, but those returns start generating returns of their own. Over time, the growth accelerates, creating a snowball effect. It’s not about putting away large sums – it’s about putting away something and giving it time to grow.
Let’s use a simple example. Imagine two friends, Carla and Sam. Carla start investing R1 000 a month at the age of 25. She invests consistently for 10 years, then stops contributing at 35. Sam, on the other hand, only begins investing at 35 and contributes R1 000 a month all the way until he turns 65.
By the time they both reach 65, who has more money? Surprisingly, it’s Carla – even though she only invested for 10 years. Why? Because her money had 30 extra years to compound and grow. Sam put in three times as much money, but he couldn’t catch up because he started later. That’s the magic of compounding.
It’s also important to understand the difference between saving and investing. Saving is about safety and liquidity – keeping money aside in a bank account for emergencies or short-term needs. Investing, on the other hand, is about growth – putting your money to work so it earns returns, which then go on to earn further returns.
The key takeaway? Start as early as you can, even with small amounts. Time and compounding will do the heavy lifting. Your future self will thank you.
Speak to a trusted financial advisor today – the sooner you begin, the greater the reward.