Eating a R1 million dinner

But what if you knew that your weekly takeout meals could be worth an extra million rand in your retirement pot?
Image: Shutterstock

If you received a R1 million bill with your restaurant dinner, your jaw would likely hit the floor. But what if you knew that your weekly takeout meals could be worth an extra million rand in your retirement pot?

This is because of the potent combination of compound interest and time, which can transform even small amounts into significant wealth. Compound interest is the process whereby your savings, and the interest earned on your savings, earn additional interest to become a powerful multiplying machine.

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As a simple example of just how powerful compound interest can be, imagine that someone offered you the choice between winning R30,000 today or a magical cent that doubled in value every day for 30 days. At face value, the first option seems far more appealing. However, if you instead chose the magical cent that doubles every day, your winnings would gradually pick up momentum as the month went by, growing from just a few rand at the end of the first week to over R5.3 million by the end of the 30 days.

Table: The magical doubling cent

Of course, there is no such thing as a magical doubling cent, and in reality, the process of earning compound interest on savings and investments works much more slowly, growing savings steadily over years and decades rather than all within the space of a month. But what the example shows is the power of what investors know as the principle of “compounding”.

How small savings on a takeout meal can transform into R1 million

Returning to our original example, consider if, at the age of 25 years old, you take a hard look at your budget, and make the decision that instead of spending R125.00 on takeout meals each week, or R500 a month, you will opt for home-cooked meals instead.

Crucially, you then make the conscious decision to invest these monthly savings instead. If you invested this money into an equity portfolio for the next 40 years, you would end up having saved a total of R240,000 towards your nest egg. But, if this portfolio then achieved average annual returns of 12% and inflation remained at 6%, by the time you retire at the age of 65 years, your investment would be worth a whopping R996,000 in real terms.

In other words, your weekly takeout alone could mean almost R1 million extra in your savings pot through the same potent combination of compound interest and time.

Graph: R500 invested monthly for 40 years

This example shows that even small amounts of money have the potential for exponential growth if invested correctly and given enough time. This is not to say that you shouldn’t treat yourself, but rather to encourage you to think twice before spending your hard-earned money. After all, manicures, expensive hairstyles, designer clothing and restaurants suddenly become far less appealing when you work out their multimillion-rand price tag in retirement.

The dark side of compounding

 When it comes to compound interest, it is important to realise that while it can act as a force of good when put to work for savings and investments, it can also destroy your wealth if put to work against you through expensive debt.

If, for example, you have a credit card with a balance of R10,000 and your bank charges you 15% per annum in interest, you would owe R11,617 at the end of the year if you leave the balance unpaid. In other words, compound interest would mean that your debt would grow instead, preventing you from saving towards your financial goals.

Likewise, the idea of opening clothing accounts and being able to buy clothes whenever you want (rather than waiting for payday) is tempting. But, in reality, interest charges and service fees mean that a simple R100 T-shirt could end up costing you twice as much.

Ultimately, one of the most important financial lessons you will ever learn is that you don’t need huge amounts of money to build wealth – even small amounts can translate into significant savings if you begin investing wisely and as early as possible. Put compound interest to work for you by investing rather than have it work against you by spending on credit. And then give your wealth the time it needs to grow.

Yanga Nozibele, Investment Associate, Cannon Asset Managers

COMMENTS   16

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12% growth? It is very unlikely that we will see double digit growth like we did a few years ago. But saving is always good advice.

Now check out the same chart with inflation . Does not look so
lekker .

They mention it is included. Anyway, so would you rather sit with R0/$0 in 40 years than with R996 000 “because inflation”?

Not that I agree with the article really, there would still be a cost to these home cooked meals, probably about half, so only R250pm to save, and one must still enjoy life and the money you’ve worked for, now, because you could die before those 40 years. So it’s a balancing act.

Wife: Koos, do you realise that if you quit smoking you will be able to buy a car in 5 years with the compound interest of the money you saved?
Koos: You didn’t smoke for more than 5 years. Where is your car?

Hit the nail on the head. Penny wise pound foolish. Rather enjoy that occasional take out. But then dont replace your car every 3 to 5 years. Drive the same one for as long as it lasts. See a million in 8 to 10 years. Why wait till retirement.

you forgot something called CGT.. that and 12% pa? haha, do you adjust your yearly % return until the figures look impressive?

why don’t we all not eat a take out, ever go to a movie, buy a nice pair of shoes, go on holiday etc. Lets all live like beggars until we are 70 years old and our body is broken.. yip, then its time to explore the world in our new shiny wheelchair!

In the real world:
1) I have to pay for the home-cooked meal, say 50% of the take-out, so the saving is only R250 pm.
2) Future returns are unknown, but given the long-term trajectory of interest rates,I would not continue to model a long-term real return of 6% on equities, as implied; 4% seems a more realistic assumption.
3) I’ll be paying fees of probably around 0,5% pa, taking the cheapest index fund option.
4) 20% withholding tax on dividends (on 2% pa, so 0.4% pa)
5) 18% CGT on total gains (including inflation!) less actual contributions (also growing with inflation at 6% pa). This comes to around R211k.

The current value of money saved (before CGT) based on the above is R237k. Subtract the R211k CGT and you are left with just R26k.

Bummer!

A Vanguard S&P500 tracker (VOO) has a 0.04% management fee and the historical return of the S&P500 is 10%, so it is not all doom and gloom. This surely has to be the safest and easiest investment for the majority of people.

Yanga – It’s good to help folk think a bit about their spending habits. What I do object to re your article is the totally misleading headline. You know that your article is not about a single meal / dinner, but are nevertheless happy to play the sound bite game.

Ethics should be at the core of all journalistic endeavours. Also, I hope this is not an ‘investment / insurance’ pitch that you use when selling your products?

Good advise seeing what a hamburger a chips will probably cost in a few years more of anc and eff marxist economic madness, if indeed they will still allow such decadent colonial delecacies to sully their spartan ideology they plan for their “our people”!

There is one crucial aspect of human nature which financial fundis do not grasp. And that is the fear of people not living long enough to enjoy the fruits of their labour. There is a definite statistic of quite a high percentage of people dying within 3 years after retiring. So it is understandable that people allow themselves to be spoilt by the occasional take out. Life is short.

You have to live as well, can’t save all your life.

Nice theoretical article on compound interest. You forget to mention that in cash 12% is IMPOSSIBLE! Second, taxation kicks in after the threshold is met which will not allow you achieve your mathematical target.

Please make sure these articles tell the whole story and not just the mathematical side of things

Sounds nice but your home cooked meal is not free so not really choosing between R1m and takeways

End of comments.

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