Don't get fooled

It has become a daunting task for most people to decide where to invest their cash. Most decisions are based on the interest rate received from the bank or insurance platform. These platforms publish interest rates, but not always disclosing what basis the calculation is done.

Simple Interest

Simple interest is expressed as a percentage, but the rate is only applicable on the initial amount invested. So this mean if your investment grow from R100 to R110 then you still earn interest on the R100 value that you were quoted for.  The platform determine the rate based on the investment term. If you get a rate that is much better than competitors you must ask the platform if the rate is expressed as Simple or compounded interest.

Example: Bank offer interest rate of 11.31% per annum (Simple Interest) for a 5 year term investment for an investment to the value of  R500 000. In this case you will earn each year interest  on the R500 000 and this interest is added to your investment value.  In summary your interest rate reduce every year as you receive interest on lower capital value.

Compound Interest

Compound rates are generally lower than the simple interest rates presented to you. The main difference is that you earn interest on your capital on a daily basis and therefore with compounded interest you earn interest on a higher amount every day growing your capital more efficiently. 

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it”. - Albert Einstein

Comparison