It’s that time of year again. Black Friday is looming, the holiday season isn’t far behind, and you’ll soon be blasted with messages telling you to spend your hard-earned money. Honestly, this happens throughout the rest of the year too, but as soon as November rolls on the pressure feels especially present. What we’re about to get into applies all year round.
We’ll get into that in a second, but allow us to take a step back and get really basic. When you put your money in a savings account, the aim is usually to leave it there for a while and grow it towards a goal. This isn’t the money in your emergency fund (which you should really have set up before you do any more goal saving). Depending on the kind of savings account you have, the money in that account could earn some interest, which means your money creates more money at the end of each day, month or year (money babies 👶🏽).
Say you’ve got a savings account with an interest rate of 10% (sjoe, that’s lekker), and you put R1000 into it. At the end of the year that 10% takes your R1000, and makes a beautiful bouncing R100 👶🏽. So now you’ve got R1100, awesome!
There are two things you can do with this sweet little money baby you’ve made.
Option 1: Withdraw and spend it!
That’s where you withdraw that R100 your nice interest rate made, and spend it on something. No harm done, since your savings are still at R1000. However, when you do this you’re essentially moving yourself back to square one. You can still grow your money, but you would have to actively deposit more money into the account to make the number bigger.
Option 2: Leave and compound it, hot stuff! 🔥
Sorry for calling you hot stuff, we got excited, this is just that good.
Come back to that R100 money baby you made with your R1000 at the end of the year. Now instead of withdrawing it, you leave it there to grow. You can call this reinvesting the interest, but really it’s more passive than that. You just leave it alone.
What happens now is at the end of the second year, the R1100 you left in there will get it on with that sexy 10% interest rate, and make an adorable R110 👶🏽! Now you’ve got R1210 in the bank, which is pretty awesome. You’ve successfully compounded your interest, and if you keep going, your savings account will go from 💰 to 💰💰💰 in no time (okay some time, have patience young grasshopper).
Obviously the amount above is just an example, and different savings accounts have different rates of interest that vest either daily, monthly or annually. The amounts also start getting more impressive when you save larger amounts - imaging the growth on R10,000! Chat to your friendly neighbourhood financial advisor to see what type of account works best for you. Also stay vigilant and don’t save your money anywhere that isn’t a verified financial product - savings accounts with crazy high monthly interest rates might seem amazing, but more often than not are actually scams.
Of course, you could also invest your money. Interest works differently there, since the amount you have invested goes up and down as the market goes up and down. But that’s a whole other kettle of fish.
So how does this relate to you? Basically, the sooner you start saving and compounding that interest, the bigger the payoff will be later in life. Why buy a tropical print Speedo now, when you can buy an island in the tropics in a few years time instead? (Always remember to dream big.)
What we’re trying to encourage is money mindfulness. Stop and think about what you really want to do with your money. Don’t get pulled into the peer pressure of spending everything on slightly discounted items just because a flashy advertisement told you a deal is 😱ONCE IN A LIFETIME😱.
If you need something, save up for it. If you don’t, then save it and let compound interest grow your wealth for a really meaningful goal further down the line.
If you still really want to drop some cash on Black Friday, look for deals that can add real value to your life. Sanlam Indie (hey look, it’s us!) will give you a boost of up to R5000 in your Wealth Bonus if you get life insurance between Black Friday and Cyber Monday, which will help to create real wealth for your future. 💙