Recipe for the Eighth Wonder

Time is the secret ingredient your investments need

By Samuel Rossouw


Investment guru Warren Buffett often refers to compound interest as the eighth wonder of the world. But how does this wonder actually work in practice? Do I need to start saving at 14 like Mr. Buffett, or can I only begin using my money after 50?

There’s nothing as convincing as a real case study to illustrate the importance of financial discipline and the advantages it brings.

Thomas started working in 2009, fresh out of university. Although he made occasional investments, he was never obliged to join a pension fund. Unfortunately, this meant he only began saving purposefully in 2015. His lifestyle allowed him to save a significant portion of his salary in 2017 and 2018.

In 2020, he moved and couldn’t save as much as he wanted, but his common sense and conscience began to trouble him. From 2021 to the end of February 2024, he tried to set aside not only his monthly contributions but also his annual bonus into his retirement annuity. The tax benefits he received were surprisingly rewarding.

Over the past ten years, Thomas has saved an average of 16.95% (instead of the prescribed 15%) of his annual salary to try to make up for his late start in saving at age 30.

The chart below shows the provision shortfall, in other words, how much his actual fund value is less than it would have been if he had saved 15% of his salary each year since 2015. What’s remarkable is that even though Thomas saved more than the prescribed percentage over the ten-year period, he still currently has a 5% provision shortfall.

Thomas saved an average of 20% of his salary over the past four years but still couldn’t erase the initial shortfall mainly created in 2015 and 2016. If Thomas wants to eliminate this shortfall, he will need to save 16.5% of his gross salary for the next six years.

The following lessons can be learned from this example:

  • The larger the capital base, the faster compound interest can start working. The chart below shows what portion of your investment at age 65 consists of (a) a R1 investment made at a certain age and (b) the growth on it. At age 60, the growth becomes significantly small, but if you invested the R1 at age 25, the growth comprises the majority of the fund value.

  • Investment returns are not linear. For example, Thomas’s return in 2020 was only 0.2%. Unfortunately, he also contributed significantly less than he should have that year. The following year, his money grew by 19.97%, but this was on a much lower capital amount than it would have been if he had made the necessary contributions.
  • Our experience also shows that investors often become too conservative after years of poor returns and too aggressive after years of good returns. I’m sure everyone remembers the major market corrections, such as the IT-bubble in 2000, the international financial crisis of 2008, “Nenegate” in 2015, and so on.

But who can remember the dates/times (and specifically the reasons) when markets increased? For example, the JSE All Share Index increased by 7.61% in October 2015, 13.98% in April 2020, 8.89% in January 2023, and 12.33% in December 2023. Since the human brain experiences the discomfort of declines more intensely than the joy of rises, we often focus too much on negative news.

Establish a long-term strategy that reflects your needs and stick to it. Only make strategic shifts as time goes on.

  • There are many factors in planning and financial markets that we cannot control, so focus on the things within your control.
  • Save as early as possible and with discipline. Thomas only started saving at age 30, and the seven years he lost simply means he has to set aside a much larger portion of his salary.
  • Try to set aside a fixed percentage of your gross salary. It won’t always be easy, but retiring with significantly less income than you’re used to is equally uncomfortable.
  • Manage a parallel plan for your goals, in other words, don’t neglect or stop your retirement provision because you want to save for a house deposit, and don’t buy your car with your home loan.

Experience has shown that mixing goals often yields poor results.

  • Be careful not to increase your standard of living in line with your salary. More expensive homes and vehicles put pressure on your ability to maintain your retirement provision at an ideal level. Thomas’s saving grace is that at this stage of his life, he can save a large portion of his salary.

Despite a relatively dismal local situation, retirement funds (e.g., a retirement annuity or pension fund) are still a good investment vehicle because:

  • Contributions (limited to maximums) are deductible for income tax, meaning the South African Revenue Service actually helps you save.
  • Interest income, dividends, and capital gains are not taxable within retirement funds.
  • You can allocate up to 45% of your retirement money to foreign assets.
  • Retirement funds are also outside your estate for estate tax purposes.

TJ Strydom concludes his book, “Koos Bekker’s Billions”, with Bekker’s response when asked at one point about the reason for his success: “I think there is always an element of luck and circumstance.”

Perhaps the effect of growth over time, sound financial discipline, and a well-thought-out investment strategy offers just the right circumstances and luck to make your financial planning a success.

Samuel Rossouw is a certified financial planner and director of Woodland Wealth. Contact him at

Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.

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