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Saving: The Magic of Compound Interest

Provided by the International Finance Corporation


Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest.  In short, you make money from your money.  Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount.  In fact, Albert Einstein once was purported to have stated,“The most powerful force in the universe is compound interest.”  The below three examples will illustrated the power of compound interest.

Example #1

By instilling the saving habit early in life, even the goal of becoming a millionaire by the age of sixty-five can be reached. By starting at the age of twenty and saving RWF95 per month, you can end up with a million rwandan francs by the age of sixty-five, assuming a 10 percent return on the money (tax deferred). This is also assuming that none of the money will be withdrawn during the waiting period.

This goal also can be reached if you wait until you are older to start saving, but the amount you must contribute monthly increases dramatically the longer you wait. For example, if you wait until you are thirty years old, you will need to save RWF263 a month. If you wait until you are forty years old, you will need to save RWF754 a month, and if you wait until you are fifty years old, you will need to save RWF2,413 a month.  The below chart also shows how you can reach the RWF1 million goal by age 65 if you prefer to make a one-time investment, monthly investment or annual investment at various ages.

Age

One-time Investment

Monthly Investment

Annual Investment

20

RWF13,719

RWF95

RWF1,391

25

RWF22,095

RWF158

RWF2,259

30

RWF35,584

RWF263

RWF3,690

35

RWF57,309

RWF442

RWF6,079

40

RWF92,296

RWF754

RWF10,168

45

RWF148,644

RWF1,317

RWF17,460

50

RWF239,392

RWF2,413

RWF31,474

55

RWF385,543

RWF4,882

RWF62,745

60

RWF620,921

RWF12,914

RWF163,797

Example #2

This table illustrates the value over time of RWF1,000 invested annually (only RWF84 a month):

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

RWF5,526

RWF12,578

RWF21,579

RWF33,066

6%

RWF5,637

RWF13,181

RWF23,276

RWF36,786

7%

RWF5,751

RWF13,816

RWF25,129

RWF40,995

8%

RWF5,867

RWF14,487

RWF27,152

RWF45,762

9%

RWF5,985

RWF15,193

RWF29,361

RWF51,160

10%

RWF6,105

RWF15,937

RWF31,772

RWF57,275

11%

RWF6,228

RWF16,722

RWF34,405

RWF64,203

12%

RWF6,353

RWF17,549

RWF37,280

RWF72,052

Example #3

Investing RWF10,000 in a one-time lump sum also pays off:

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

RWF12,763

RWF16,289

RWF20,789

RWF26,533

6%

RWF13,382

RWF17,908

RWF23,966

RWF32,071

7%

RWF14,026

RWF19,672

RWF27,590

RWF38,697

8%

RWF14,693

RWF21,589

RWF31,722

RWF46,610

9%

RWF15,386

RWF23,674

RWF36,425

RWF56,044

10%

RWF16,105

RWF25,937

RWF41,772

RWF67,275

11%

RWF16,851

RWF28,394

RWF47,772

RWF80,623

12%

RWF17,623

RWF31,058

RWF54,736

RWF96,463

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