Compound interest explained
Albert Einstein reportedly called compound interest the eighth wonder of the world. Whether or not he did, it's the single most important idea in long-term investing — here's why.
Simple vs compound
With simple interest, you earn returns only on your original amount. With compound interest, you earn returns on your original amount and on all the returns you've already earned. Your money starts growing on itself — and that snowball gets bigger every year.
Invest R10,000 at 8% a year. In year one you earn R800. In year two you earn 8% on R10,800, not R10,000 — so R864. Each year the base grows, and so does the growth.
Why time is the real superpower
Compounding starts slowly and then accelerates dramatically in the later years. That means the earlier you start, the more disproportionate the payoff. Someone who invests for 30 years doesn't just get twice as much as someone who invests for 15 — they can end up with several times more, from the same monthly amount.
The rule of 72
Want a quick estimate of how long it takes your money to double? Divide 72 by your annual return. At 8% a year, money doubles roughly every nine years (72 ÷ 8 = 9). At 12%, every six years. It's rough, but it makes the power of higher, steadier returns tangible.
How to put compounding to work
- Start now — time matters more than the amount.
- Invest regularly — steady monthly contributions feed the snowball. See how to start investing.
- Reinvest returns — reinvested dividends and growth compound instead of leaking away.
- Keep costs low — high fees compound against you, so favour low-cost ETFs.
- Use tax shelters — a TFSA lets growth compound without tax dragging it down.
The flip side
Compounding also works against you — on debt. The same maths that grows your investments grows what you owe on a credit card or store account. That's why clearing high-interest debt is often the best "investment" you can make before you begin.