Every shilling saved monthly grows to sh705 in 25 years

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

18 February 2007

Money always wakes people up. After last weeks suggestion that you can run a bank bankrupt by depositing a small amount of money for a very long time, many readers want to know how to build their savings.

The solution is simple: start saving right now with as much as you can afford, no matter how small it may seem. There are many banks that will open savings accounts with as little as Sh3,000. If you start with this amount and then add only sh1,000 every month, at the end of one year, you will have put aside a total of sh14,000; that is, the first sh3,000 plus sh11,000 (sh1,000 per month for 11 months).

Now, suppose the bank pays a paltry 6 percent interest per year; then at the end of the first month, you get half a percent (that is, 6 percent per year divided by 12 months) of sh3,000 which is equal to only sh15! But then you add the sh1,000 and your balance becomes sh4,015.

At the end of the second month, you get another half a percent, but this time it calculated on sh4,015 and it comes to sh20.01. When you make your third deposit, the total balance now comes to sh5,035.08. If you continue this process to the end of the year, your account will have sh14,520.60. Note that the total interest you have earned is only sh520.60

In five years, you will have sh72,816.58 in the bank, but you direct contribution is sh63,000; the extra sh9,816.58 is interest. Clearly, if you looked at your statement at the end of the first year and saw only sh520 interest, you might get disappointed and stop saving, but by the fifth year, the bank has “given” you almost sh10,000!

Ten years down the road, you will have sh168,337.54 in you account, of which sh45,333.54 will be accumulated interest. And if you continue to the 25th year, you will earn more from the bank than what you put in from your pocket: your balance will be sh705,388.87; comprising of sh300,000 from you and sh403,388.87 from the bank!

At this point you may even stop adding any more money to the account; after all the monthly interest (sh3,527) is higher than you contribution(sh1,000)! If you left it for another 25 years… just think about it.

Nevertheless, you might feel that 25 years is too long. But on the other hand, sh1,000 monthly is very little… and it grows to over sh700,000. To put the numbers into perspective, it might bet better to look at it this way: for every shilling you save monthly, you will have sh705 after 25 years.

The other side of the coin is that if you take a loan and repay over a very long period, your monthly installments will be low but the interest you will pay to the bank will be very many times more than the amount you took out. Exactly how much? Well, that is a story for another day.