Last year we had a Money Matters show where we illustrated how you could save R1.1 million within 15 years using your tax-free savings allowance of R2 750 per month.
A viewer asked us if it was possible to reach R1.1 million within five years by tripling the amount to R8 250 per month.
This is where the power of compounding, and time, becomes so important. If you invested R2 750 per month for 15 years, you would have invested R495 000. If the investment grew at 10% per annum, it would be worth over R1.1 million.
However, if you invested R8 250 a month for five years, you would also have invested R495 000, but even if you had the same rate of return at 10% per annum, it would have grown to only R638 000.
This is because over the shorter period, you had not benefited from the power of compounding. At a growth rate of 10%, your money doubles every seven years. So, the longer you invest for, the more opportunity there is for your money to double.
In this case, if you invested R8 250 a month for five years, it would take another five years leaving the money to grow in order to reach the R1.1 million level. If you continued to invest R8 250 for longer than five years, you would reach R1.1 million in less than eight years.
If you still wanted to have R1.1 million within five years, you would have to invest over R14 000 a month or R840 000 over five years.
This is why the longer you invest for, the less you have to contribute because time and compounding do the rest for you.