Einstein once said that compound interest is the eighth wonder of the world. “He who understands it, earns it… he who doesn’t… pays it”. The challenge of compound interest is it takes so long to build momentum, that most of us lose interest before we reap the benefits. Time. One of the 3 major elements of compound interest.
The easiest way to understand compound interest is “earning interest on interest”… or free money on free money.
Our children have a very long time until they retire. But like all young people (and older ones too!), we believe that that means we don’t need to do something about it now.
How you can transform your kid’s lives
So I did a few sums on what happens if your child is born today and you begin investing in a Tax Free Savings Account (or ISA’s in the UK) on their behalf. I used the maximum per year of R33,000 (or R2,750 per month) and R1000 per month. The total amount you are allowed to contribute is R500,000, which at R2,750 per month means you can only contribute for 15 years… then the money just sits and compounds.
The results are astonishing. By the time your child is 20, they would have over R1m in today’s money (nice 21st present), and by the time they are 60, you could give them a monthly income of R137,217 in today’s money (nice retirement lifestyle).
And that is the power of compounding. Do it for yourself, do it for your kids. And because they have time, the risk of investing in shares is low. So get the family to contribute to their account instead of birthday presents, and they’ll get the gift that keeps on giving.
Lastly, when you do it in a Tax Free Savings account, all the dividends and interest income are tax free. This means that the 20% dividend tax is 0% and the same for interest income.
Email us if you’d like us to help you set this up.