177. The Power Of Compounding Interest

Compounding can feel like a finance buzzword, but it’s actually a simple idea that can reshape your whole money life: your growth starts earning growth. We sit down and unpack the “confounding and compounding” lesson from Morgan Housel’s The Psychology of Money, using plain language and real numbers that make the concept click. If you’ve ever wondered why your investments look slow at first, or why everyone keeps saying “start early”, this conversation is for you. 

We talk about the snowball effect of compound interest and why time is the factor most people underestimate. Warren Buffett comes up as the perfect case study: yes, he’s skilled, but his real advantage is how long he has stayed invested. That leads to a practical takeaway for long-term investing in South Africa: spend time in the market, don’t get shaken out by headlines, and focus on building a system you can stick to through market ups and downs. 

Then we get specific. We compare saving R100 a month “under the mattress” versus investing it with long-term market growth, and the gap is staggering. We also explain why escalating your monthly contribution each year matters, how inflation quietly erodes cash, and how fees can reduce your compounding over decades. Finally, we land on the habit that makes all of it easier: set a debit order, automate the escalation, and stop checking quarterly returns like they’re a scoreboard. 

If you found this helpful, subscribe, share the episode with a friend who keeps putting off investing, and leave a review so more people can learn how compounding really works.

Transcript

Welcome And Book Context

SPEAKER_00 0:12

Hello everybody. Welcome to Know Your Money. I'm Bron Man Weiner.

SPEAKER_01 0:16

And I'm Craig Finch, and we are from Growth Financial Planning. We hope you enjoy our podcast.

SPEAKER_00 0:22

Hey Craig, nice to see you again.

SPEAKER_01 0:24

Ron, good to see you. The book's still on the table.

SPEAKER_00 0:27

Yes, absolutely. Back to the Psychology of Money by Morgan Hausel. And like we've said in the other episodes of this, I really encourage you to get this book because it is really wonderful. There's over a million copies that have been sold, and it just really breaks down these things that we think are so complicated. But if you actually get your psychology of money right first, the actual investing in all of that is will be a piece of cake. So

Compounding And The Snowball

SPEAKER_00 0:55

the episode we're on now is confounding and compounding. And compounding is probably one of your most favorite topics that you love trying to explain to people. So do you want to take us away?

SPEAKER_01 1:09

Compounding wasn't taught at school. It should be, in my view, a subject at school, because it's difficult to understand. And it's a simple concept. So the it's sort of like, but we can't we can imagine this because we don't live in a snow full country. But if you had a snowball that's rolling down a hill, the longer the hill, the bigger the snowball will end at the bottom of that hill. The length of the hill is time. Time is such an important factor in compounding. And you'll you'll chat about Warren Buffett as well. I know you've got some stats there, but so time is very important. And while you start when you start saving, you look at one month, three months, five months, and you look at your every quarter you might look at your statement and go, oh, what's going on? Because there's some crisis in the world. It's there are going to be blip blips on the way. But in the end, time is the most important factor. So it's almost doesn't really matter which uh equity fund you go into. Equity, I'm talking about the stock market. You have to go in the stock market because that's where the the returns are far higher than in a property portfolio or in a cash portfolio. So that's where companies make money and they change in that. So if you go, if you've got a good equity, a good stock manager, it doesn't almost matter who it is, as long as you spend time in that portfolio. So if you spend 20, 40, 50 years, that's gonna make a massive difference. Back to my Australian model that when you start working, you have to buy your retirement fund. And the long normally you start at 23, 24, you're gonna have at least 40 years, hopefully, and maybe even later, of

Warren Buffett: Skill Plus Time

SPEAKER_01 3:05

investing. And then maybe you can pass some of that on to your family.

SPEAKER_00 3:09

Yeah.

SPEAKER_01 3:09

And they start with something and they continue for another 40 years. So that compounding is incredible because it's interest on interest on interest, and the longer you have it. And you've got some stats. I think you wrote some numbers down, which is amazing. And Warren Buffett, I think I'll just say that he's been investing since he was about 10 years old. And he's 95 now. So he's got 85. So yes, he's a billionaire, but he's he's not as smart as I mean, he is smart because he stuck to the he stuck to the program. And he was smart in buying shares and he and he didn't get deviated. For many years he bought Coke shares and they weren't doing well, but he knew people still still drink coke and those shares will do well one day, and that's what happens. And anyway, the point is that he's he stuck on to the concept of keeping money invested for 85 years. I mean, that's incredible. Most of us do it for 20 years. Yeah. And that's if we're lucky. If you're lucky, I mean that's it. And you should do it for 40 years if you want to retire. So that's the big thing about compounding is time.

SPEAKER_00 4:13

A hundred percent. And in the book they say um about Warren Buck Buffett, his skill is investing, but his secret is time. So he is a skillful investor and he knows what he's doing. But the thing that's made him the most wealthy is the time in the market, and

R100 A Month: Mattress Vs Market

SPEAKER_00 4:30

that's what we harp on about all the time and everything that we're saying. Um, and I think in essence, what we're trying to say is no matter what it is, just start today. Correct. So, in terms of those stats, so what I did is I took a person that is 20 and a person that is 25 uh 30. So if there was a person that is 20 and every single month they took a hundred rand and they put it under their mattress. Okay, at the age of 65, they would have 54,000 Rand. If they just took that 100 Rand and they put it under their mattress.

SPEAKER_01 5:14

Because they're not earning interest, they don't know.

SPEAKER_00 5:15

They're not earning interest, they're just saving it in that place. If they took that hundred Rand and they invested it in the markets and they got a 10% growth rate over that period, that hundred that fifty-four thousand rand would now be worth a million rand.

unknown 5:34

Sure.

SPEAKER_00 5:35

So it's a huge jump.

SPEAKER_01 5:38

So a hundred rand a month and it grows at ten percent, every year you're gonna have a million rand.

SPEAKER_00 5:44

Yes, for 45 years. Now that's one part of compounding. It's the money that you put in that gets interest upon interest upon interest. The second part that we as financial planners always encourage people to do is add an escalation on that.

Escalation Fees And Staying Invested

SPEAKER_00 6:05

So what it means is this year you put a hundred rand, but next year we have a 10% escalation, so it's a hundred and ten. And then every year it keeps going up because it sort of tries to keep up with inflation and it's just the better way of doing things. If you did that, so just to run back that 20 years old. 20 years old, if you put 100 Rand under your mattress for 45 years, you would have 54,000 Rand. If you're 20 years old and you take a hundred Rand and you add a 10% escalation onto that, you would have 4.7 million Rand.

unknown 6:46

Sure.

SPEAKER_00 6:47

And I obviously did some other ones, but you don't really even need to look at it. Let's just go look at the thousand Rand number. If you put a thousand Rand for 45 years under your mattress, you'd have 540,000. If you put that thousand Rand with a 10% escalation in 45 years' time, you would have 47 million Rand. And I think the essence of that is that. So just invest in the market, like you're saying. But don't do that 100% blindly. What we've shown you here is where your return is on average a 10%.

SPEAKER_01 7:27

Yeah.

SPEAKER_00 7:28

If you're going in something and they're taking a lot of fees or you don't have that escalation on it, those things are important and important to be aware of so that it can compound further. But compounding is, I think they say, this the eighth wonder of the world. And it's amazing.

SPEAKER_01 7:46

Yeah, if you're in the right product and you with a good uh company that's looking after your money, and you're with a good manager that's going to invest the money for you. And almost, we know there's a lot of great managers in South Africa. So it doesn't really matter which one you in. The big thing is the length of time you're with that person, with that product and that manager and the platform that's looking after your money. It's just your discipline of leaving it alone. Just let it go.

SPEAKER_00 8:18

Absolutely.

SPEAKER_01 8:18

And just start somewhere. People often say to us, Oh, but I can't start. We show them what they have to start it, and often the number is quite daunting. But we say start where you can afford it, and it's comfortable that you're not going to stop it, and just don't think about it.

SPEAKER_00 8:32

Yeah.

SPEAKER_01 8:32

Goes through on a debit order every month, every year it escalates. You don't think about that either. And you don't look at it. Don't look at the quarterly returns. Don't look at it when the news tells you it's bad news. News often doesn't tell you when it's good news either, so don't even look at it then. Just let it go. And I promise you, 40 years' time, you'll be very surprised.

SPEAKER_00 8:52

100%. And if there's something that I like would encourage anyone that's listening, if you have a child or you're about to have a child, commit to that hundred rand. It doesn't need to be a thousand rand. It doesn't even need to be a hundred rand if that's a lot for you. Commit to that 50 Rand a month, that 100 Rand a month that just goes into an account, even if it's just a bank account for the for now. No, yes, you're not going to get those amazing returns, but just commit to that, putting it away, because then you are better than Warren Buffett because you're going to be investing from zero instead of ten.

SPEAKER_01 9:31

No, exactly.

SPEAKER_00 9:32

And yes, it might not be as much as what he invested, but you can make use of that compounding and you can

Kids Investing Debit Orders And Close

SPEAKER_00 9:40

literally change your life and your children's lives.

SPEAKER_01 9:42

Yeah. And it's a discipline of doing something and st staying with it.

SPEAKER_00 9:47

Yeah.

SPEAKER_01 9:47

When that snowball starts rolling down the hill, it's hard to stop it. So don't stop it.

SPEAKER_00 9:52

And just sorry, lastly, I think what you said is so important. It must be an automatic debit order.

SPEAKER_01 9:56

Correct.

SPEAKER_00 9:57

You mustn't be putting that through yourself. You just send it off and it goes.

SPEAKER_01 10:01

This goes without you knowing. As your salary comes, the next day it goes off, you don't even know it's gone.

SPEAKER_00 10:06

Awesome. So those numbers are impressive. Amazing.

unknown 10:11

Thanks.

SPEAKER_01 10:13

Thank you for listening. If you have enjoyed this podcast, would like to subscribe, please visit our website www.growthfp.co.za. The information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.