What Is Compound Interest?
Compound interest means you earn interest on your interest. A R10,000 deposit at 10% grows to R73,280 over 20 years with monthly compounding — versus R30,000 with simple interest. Here is exactly how it works, the formula, and how to use it to your advantage in South Africa.
✓ Fact-checkedUpdated May 2026Sources: National Treasury·SARS (tax-free savings accounts)·SA Reserve Bank
Key takeaways
- ✓Compound interest earns interest on your accumulated interest — not just your original deposit.
- ✓Formula: A = P(1 + r/n)^(nt). At 10% monthly compounding, R10,000 becomes R73,280 in 20 years.
- ✓The Rule of 72: divide 72 by your rate to find years to double. At 10%, money doubles in 7.2 years.
- ✓South African TFSAs (R36 000/year cap) let compound interest grow tax-free — no interest tax drag.
- ✓Compound interest also applies to debt. Credit card rates of 20–22% can double debt in 3–4 years.
The simple definition
Compound interest is interest calculated on both your original deposit (the principal) and the interest you have already accumulated. Each time interest is added to your balance, that interest starts earning interest of its own.
The contrast is simple interest, which always calculates on the original deposit only. Simple interest grows in a straight line. Compound interest grows exponentially — slowly at first, then faster and faster over time.
Quick example — R1,000 at 10% for 3 years
Simple: R1,000 × 10% = R100 per year. After 3 years: R1,300.
Compound (monthly): Year 1 → R1,104.71. Year 2 → R1,220.39. Year 3 → R1,349.86.
Difference after 3 years: R49.86. After 30 years: the difference is massive — see the table below.
The compound interest formula
A = P(1 + r/n)^(nt)
Worked example — R10,000 at 10% for 20 years (monthly compounding)
A = 10,000 × (1 + 0.10/12)^(12×20)
A = 10,000 × (1.008333...)^240
A = 10,000 × 7.328 = R73,280
You deposited R10,000. Interest earned: R63,280. Your original deposit is just 13.7% of the final balance.
Compound vs simple interest — R10,000 at 10%
Monthly compounding vs simple interest on the same R10,000 starting balance. The gap widens dramatically over time.
| Years | Simple interest | Compound (monthly) | Extra from compounding |
|---|---|---|---|
| 5 years | R 15 000 | R 16 453 | +R 1 453 |
| 10 years | R 20 000 | R 27 070 | +R 7 070 |
| 15 years | R 25 000 | R 44 539 | +R 19 539 |
| 20 years | R 30 000 | R 73 281 | +R 43 281 |
| 30 years | R 40 000 | R 198 374 | +R 158 374 |
R10,000 starting balance, 10% p.a. Compound interest assumes monthly compounding (n=12). No additional contributions.
Growth at different interest rates — R10,000 starting balance
Monthly compounding. 6% ≈ a conservative SA money market account. 8–10% ≈ a balanced unit trust or ETF. 12% ≈ an optimistic equity return over a long period.
| Years | 6% p.a. | 8% p.a. | 10% p.a. | 12% p.a. |
|---|---|---|---|---|
| 1 years | R 10 617 | R 10 830 | R 11 047 | R 11 268 |
| 5 years | R 13 489 | R 14 898 | R 16 453 | R 18 167 |
| 10 years | R 18 194 | R 22 196 | R 27 070 | R 33 004 |
| 20 years | R 33 102 | R 49 268 | R 73 281 | R 108 926 |
R10,000 starting balance, no additional contributions, monthly compounding. Figures are before tax and inflation adjustments.
Rule of 72 — how to estimate doubling time
Divide 72 by your annual interest rate (as a percentage) to estimate how many years it takes your money to double.
4% → doubles in 18 years
Conservative savings account
6% → doubles in 12 years
SA money market / fixed deposit
8% → doubles in 9 years
Conservative balanced fund
10% → doubles in 7.2 years
Long-run equity ETF estimate
12% → doubles in 6 years
Optimistic equity return
22% → doubles in 3.3 years
⚠️ Credit card debt working against you
The Rule of 72 is an approximation — accurate within 1–2 years for typical rates. It works for any compounding growth, including inflation, salary increases, or debt growth.
Calculate your compound interest
Enter your deposit, rate, and term to see exactly how your money grows — year by year, with and without extra contributions.
Open compound interest calculator →TFSA and compound interest — the tax-free advantage
Interest earned inside a Tax-Free Savings Account (TFSA) is completely exempt from tax — no interest tax, no dividends tax, no capital gains tax. You can contribute up to R36 000 per year (R500 000 lifetime).
Outside a TFSA, South African individuals pay income tax on interest above R23,800 per year (R34,500 if over 65). On a R100,000 balance earning 8% (R8,000 interest), a middle-income earner might pay 26–36% tax on the interest — effectively reducing their compound rate from 8% to 5–6%. Over 20 years, this drag is significant.
Practical strategy — stack your TFSA first
- Max your TFSA (R36 000/year) — 100% tax-free compounding.
- Add to a retirement annuity (RA) — tax deduction + deferred compounding.
- Then invest in taxable accounts for anything above those limits.
Even if you can only invest a small amount, starting in a TFSA earlier is almost always better than waiting to invest more later. Time in the market — and the compounding clock — matters more than the size of your contribution.
Compound interest on debt — when it works against you
The same exponential force that builds wealth also builds debt. South African credit cards typically charge 20–22% per year, compounding monthly. At 22%, a R10,000 credit card balance that you never touch grows to R85,000 in 11 years.
Credit card (22%)
Doubles in 3.3 years
Pay off immediately — priority #1
Personal loan (18%)
Doubles in 4 years
Pay off before investing
Vehicle finance (12.25%)
Doubles in 5.9 years
Pay minimums; invest surplus if return > rate
Home loan (11.25%)
Doubles in 6.4 years
Consider extra payments or invest — depends on rate
The general rule: pay off debt with a rate higher than your expected investment return before putting money into savings. A TFSA earning 8% does not help you if you are paying 22% on a credit card balance.
Frequently asked questions
What is compound interest in simple terms?
Compound interest means you earn interest on both your original deposit and on the interest you have already earned. For example, if you deposit R1,000 at 10% interest, you earn R100 in year 1 (total: R1,100). In year 2 you earn 10% on R1,100 — that's R110, not R100. Over time this snowball effect is very powerful. Simple interest, by contrast, always calculates on the original deposit only.
What is the compound interest formula?
A = P(1 + r/n)^(nt). Where: A = final amount, P = principal (starting deposit), r = annual interest rate as a decimal (e.g. 10% = 0.10), n = number of times interest compounds per year (monthly = 12), t = time in years. Example: R10,000 at 10% compounded monthly for 20 years → A = 10,000 × (1 + 0.10/12)^(12×20) = R73,280.
How often does compound interest compound in South Africa?
It depends on the account. Most South African savings accounts and money market accounts compound monthly or daily. Fixed deposits typically compound at maturity (yearly or at term end). Unit trust and ETF investments compound continuously as dividends are reinvested. The more frequently interest compounds, the faster your money grows — monthly compounding is better than annual compounding at the same stated rate.
What is the difference between compound and simple interest?
Simple interest calculates only on your original deposit. Compound interest calculates on your deposit plus accumulated interest. Over short periods (1–2 years) the difference is small. Over long periods (20–30 years) it is enormous. R10,000 at 10% simple interest for 30 years = R40,000. The same at 10% compound (monthly) = R198,374 — nearly 5× more.
How does a TFSA benefit from compound interest?
A Tax-Free Savings Account (TFSA) lets you contribute up to R36 000 per year (R500 000 lifetime) and pay zero tax on interest, dividends, or capital gains. Normally, interest income above R23,800 per year (R34,500 if over 65) is taxed. Inside a TFSA, every rand of interest is reinvested at full compound speed — no tax drag. Over 20 years this can add tens of thousands to your outcome compared to a taxable account at the same interest rate.
What is the Rule of 72 for compound interest?
The Rule of 72 is a mental shortcut: divide 72 by your annual interest rate to estimate how many years it takes your money to double. At 6% → 72÷6 = 12 years. At 10% → 72÷10 = 7.2 years. At 12% → 72÷12 = 6 years. It is approximate but accurate within 1–2 years for rates between 4% and 14%. Useful for quick "back of envelope" comparisons between savings products.
What South African accounts pay compound interest?
Tax-Free Savings Accounts (TFSAs) — especially ETF-based ones — compound tax-free. Unit trust investments reinvest dividends for compounding. Standard bank savings accounts and money market accounts compound monthly. Fixed deposits compound at maturity. Retirement annuities (RAs) compound inside the fund, with growth tax-deferred until retirement. The account wrapper (TFSA vs taxed) and the underlying rate both matter — a TFSA at 8% outperforms a taxed account at 10% once your income is above the interest exemption threshold.
Does compound interest apply to debt?
Yes — and this is important. Compound interest works against you on debt just as it works for you on savings. Credit card debt typically compounds daily or monthly at rates of 20–22% per year. At 22%, debt doubles in about 3.3 years (Rule of 72). This is why high-interest debt should generally be paid off before prioritising savings — the compound rate on debt often exceeds the compound rate you can earn on savings.
Data: Effective 1 March 2026 · SARS — tax-free savings account rules · National Treasury TFSA regulations · NCR — credit card interest disclosure · See methodology
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