Interest is the cost of using somebody else’s money.
When you borrow money, you pay interest.
When you lend money, you earn interest.
If you borrow money, you will need to repay what you borrow. To compensate the lender (which is usually the bank in the form of a credit card or loan) for the risk of lending to you, you need to repay more than you borrowed.
If you have extra money available you can deposit it in a savings account and let the bank lend it out. You will earn interest on the money that you have deposited in the bank. The amount you earn depends on the interest rate, which is usually quoted as a percentage rate per year.
You deposit R100 in a savings account that pays a 3% interest rate.
Multiply R100 in savings by 3% interest
R100 x .03 = R3 in earnings
Account balance = R103
The difference might seem small, but we are only talking about your first R100 which is a start.
For every R100, you’ll earn a bit more. Over time and as you deposit more, the process will continue to snowball into bigger earnings. If you leave the account alone without taking out money, you’ll earn far more in the long term.
Every month or quarter the bank pays interest on your savings. You’ll see your account balance go up, and you can either spend that money or keep it in the account so it continues to earn more interest. Your savings can really build momentum when you leave the interest in your account for a long time – you’ll start earning interest on that money as well as on your original deposit.
Earning interest on top of interest you earned previously is known as compound interest.
Interesting fact: If you had to keep investing R100 per month over a period of 10 years at only 3% interest you would have R16 894.50 at the end of the 10 years.