The eighth wonder
What compound interest actually does
Simple interest grows in a straight line — same rand of interest each year, calculated on the original deposit. Compound interest grows in a curve, because each year’s interest joins the principal and starts earning interest itself. Over short horizons the difference is small. Over long horizons it’s enormous.
The formula
A = P × (1 + r/n)^(n × t)
P is the principal, r is the annual rate (as a decimal), n is the number of compoundings per year, and t is the number of years. The calculator above also handles monthly contributions on top of the principal — that’s the future-value-of-an-annuity formula, layered onto the same compounding maths.
Why time beats amount
The single most counter-intuitive thing about compounding: starting earlier with less usually outperforms starting later with more. An example at 8% annual return, compounded monthly:
- Saver A: R500/month from age 25 to 55 (30 years). Contributed R180,000. Final balance ~R750,000.
- Saver B: R1,500/month from age 35 to 55 (20 years). Contributed R360,000. Final balance ~R890,000.
- Saver C: R5,000/month from age 50 to 55 (5 years). Contributed R300,000. Final balance ~R370,000.
Saver A contributed half what Saver B did and ended up with roughly 85% of B’s balance — because A had 10 extra years of compounding. Saver C contributed almost as much as Saver A but ended up with half as much, because the money didn’t have enough time to compound.
The Tax-Free Savings Account
South Africa’s biggest gift to long-term savers. A TFSA wraps a savings account or investment account so that every Rand of interest, dividends, and capital gain inside it is tax-free, for life. Annual and lifetime contribution limits apply — set by SARS and updated occasionally. Exceeding either incurs penalty tax, so keep an eye on the cap.
Outside a TFSA, interest income is taxable. SARS gives you an annual interest exemption — a fixed Rand amount of interest that’s tax-free each year (higher for over-65s). Above that, interest is added to your taxable income and taxed at your marginal rate. The current exemption is on sars.gov.za.
For most South Africans, the priority order is: max the TFSA first, then contribute to retirement (RA or pension fund — also tax-advantaged), then taxable accounts.
Inflation: the silent return-eater
A 7% nominal return sounds good. But if inflation runs at 5%, your real (inflation-adjusted) return is closer to 2%. Your money is growing in nominal Rand but barely in purchasing power. SA inflation has averaged 4–6% over the long run.
To grow real purchasing power, you need a return meaningfully above inflation. Cash savings accounts struggle with this — they often track inflation but don’t clear it by much. Equities (via a TFSA, unit trust, or ETF) historically have, though with much more volatility along the way. The trade-off comes down to time horizon and tolerance for short-term swings.
What this calculator doesn’t do
Two things to layer on yourself when modelling a real savings plan:
- Variable returns. Real investments don’t earn exactly 8% every year. They earn 12% one year, -3% the next, 14% the year after. The calculator assumes a constant rate, which is fine for planning but optimistic at the edges.
- Tax. Outside a TFSA, the final balance shown is gross of tax. The interest portion will be taxable at your marginal rate above the SARS exemption. For TFSA contributions, ignore this.