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I've always came across articles saying that investing money is a such good idea. However, whenever I started reading to gain more insight, I would come across terms like "compound interest", "annual percentage yield", and "time value of money", and I would instantly lose interest. It wasn't until I started reading Dave Ramsey's book, "The Total Money Makeover" that I truly started appreciating the power of investing for driving financial growth.

Every article I read started with, "If you can invest as little as $1,000, then do this or that". This made me think that such articles surely don't apply to my financial situation as an Egyptian twenty-something. That turned out not to be true. Even if you earn around 1,000 Egyptian pounds monthly, I believe this article still holds tremendous value. Also, most of the financial resources out there are tailored to U.S. residents, so I tried my best to adjust all advice to fit Egyptian standards.

Since investing is a vast sea that I haven't fully grasped, I tried to keep this article as simple and clean as possible by only focusing on one simple concept: taking advantage of compound interest using CDs.

What is a CD (certificate of deposit)?

A certificate of deposit (شهادة ادخار) is a product offered by banks where you leave a sum of your money untouched for a predetermined period of time in exchange for gaining interest on the money. The returns are either monthly, quarterly, or annually.

To clarify, if you have 10,000 LE and you buy a 1-year CD with 10% interest rate, after a year, you'll be left with 1,000 LE on top of your original 10,000 (10% of 10,000 is 1,000). If this CD has a monthly return scheme, the 1,000 will be distributed over the whole year yielding 83 LE each month.

Each bank sets a duration after which you can redeem the full amount of the certificate, which is usually 6 months, meaning that you'll be allowed to get your original sum of money back after this period is over.

There are CDs offering both fixed and variable interest rates but for the sake of simplicity, I'll only be focusing on fixed-rate CDs here.

"Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn’t...pays it.” -Albert Einstein.

What is compound interest?

Compound interest is the addition of the interest to the original deposited sum to be reinvested. In other words, it is reinvesting the interest gains (الأرباح) rather than withdrawing them so that interest in the next period is earned on the original sum plus previously accumulated interest.

To simplify, let's go through the following scenario: You initially start investing 5,000 Egyptian pounds by buying a CD with an interest rate of 10% that has monthly returns. Each month, you take the deposited return funds plus 1,000 LE that you have saved out of your salary that month and buy a new CD with 10% interest rate as well. If you do this consistently over the period of 5 years, you'll be left with 85,000 LE. Over 10 years, that sum would be 218,000 LE, and over 20, it would be 796,000 LE. This is illustrated in the following figure. It's in U.S. dollars but the currency doesn't matter for the sake of this example.

As you can see, the true power of compound interest really shines in the later years as opposed to the early ones. That's why it's referred to as a "long game".

If you want to play around with the numbers, here is a compound interest calculator that lets you determine how much your money can grow using the power of compound interest. If you haven't fully grasped the idea behind compound interest, this YouTube video explains the concept in a very clean, simple manner.

What governs interest rates?

As a rule of thumb, as a country's economy worsens, the interest rates offered by the banks tend to get higher. This way, the government aims to encourage people to deposit their money into national banks and leave it untouched for a period of time so that the government would have a flux of cash on hand that can be utilized in driving growth projects, thus making the economy stronger.

To put things into perspective, CDs in the U.S. tend to offer an interest rate of ~0.5% while currently in Egypt, CDs offer ~10% interest rates. Back in 2016, CDs with interest rates as high as 20% were issued, but are now cancelled. This means that as the Egyptian economy gets better, interest rates are expected to get lower and lower, which is another reason why you should start investing now as opposed to later to reap maximum benefits.

Whenever you decide to buy a CD, a quick Google search would reveal the options with the best interest rates available. Generally, government-backed national banks such as the NBE (البنك الأهلى المصرى) and Banque Misr tend to have the highest interest rates as opposed to private banks. For example, here are the current CDs offered by the National Bank of Egypt.

How to start?

This is just an example of the numerous pathways available and one that I have personally tried. I recommend you do your own research and choose what suits your preferences.

1. If you don't have one already, open a bank account at the National Bank of Egypt (البنك الأهلى المصرى)
2. Deposit 5,000 LE (or whatever your initial investment is) into your bank account.
3. Buy a 3-year CD with 11% interest rate. (This is the highest interest rate available at the NBE at the time of writing.)(You can buy CDs through NBE's phone app without personally going to the bank.)
4. Save up 1,000 LE monthly (or whatever you can manage) plus the return funds deposited into your account each month and purchase a new certificate with the highest interest rate available.
5. Repeat!

The key here is to try limiting withdrawing money from your bank account to let compound interest magic take place.

Take away:

When it comes to investing, when you start saving holds more importance than how much you save. As demonstrated, a small initial investment left untouched for a long period of time can add up to a large sum even if you never invest another dime. So if you want to make the most of the power of compound interest, it’s important to start early, contribute whenever you can, and be consistent. That’s the power of compound interest and why it pays to start saving now.

As a disclosure, the validity of fixed-rate CDs from an Islamic standpoint has been extensively discussed, but I tried keeping this article as factual and objective as possible.

This article required a lot of effort and research time. If you think that it might offer value for you or someone else, please do share it.