AT THE END OF THIS LESSON, YOU WILL BE ABLE TO:
Earlier Themba and Sophie spoke about the Secret of the Lion and the different savings and investment options that she could use to grow her money. If we put the Secret of the Lion together with the Secret of the Buffalo, we will see how Sophie can make her money work for her!
Themba reminds Sophie of the conversation they had about compound interest. He says he is going to go through compound interest again as it is very important to making your money work for you.
Let’s look at what would happen if you saved without interest.
If you saved ZWL1 000 every year for 10 years and kept the savings under your mattress, your money wouldn’t earn any interest. After 10 years it would be worth: ZWL1 000x 10 = 10 000
Although that might sound like a lot of money it really isn’t if you have been saving for 10 years. Also, you haven’t considered the effect of inflation.
Inflation can threaten the growth of your savings and investments. You will hear on the radio how people talk about inflation and the Consumer Price Index (CPI) but what do these terms mean? Inflation is the measure of how much the price of goods and services increase from year to year. To calculate inflation they take a basic shopping basket of goods that most people would use (like basic groceries, transport, rent and electricity) and then compare the total price of the basket of goods to what it cost the year before. From this the average percentage increase from year to year is calculated and this is called the inflation rate or CPI.
This means that how much you can buy decreases by the inflation rate. R100 could buy you more last year than it can this year. Your investments need to take inflation into account in order to get real growth. Putting your money under your mattress means that you actually lose money!