Compounding is the process of generating more return on an asset’s reinvested earnings. To work, it requires two things: the reinvestment of earnings and time. Compound interest can help your initial investment grow exponentially. For younger investors, it is the greatest investing tool possible, and the #1 argument for starting as early as possible.
Compound Interest in Investing
There is a common trait among those who obtain and retain great wealth over a long period of time. This trait is the appreciation of the awesome power of compounding investment returns. It is the source of the colossal wealth of major banks, insurance, and credit card companies in most parts of the world. Those who develop this appreciation, especially when they were young, have an excellent chance of becoming prosperous.
Using compound interest to invest can be done in so many ways and in different windows of investment that are available to humans. For instance, you may use this system by setting aside a given amount of money and re-invest it over time, or you may choose to keep on adding more funds into the investment over time.
Any serious wealth builder cannot afford to ignore the power of compound interest. If you chose to go the way of compounding, results might appear unimpressive in the early years. Of course, there will always be trinkets, expensive cars and luxuries to lure you from your plans. But, think about this: compound interest is like a daredevil ride in an amusement park. It often starts slowly but ultimately reaches tremendous pace and never stops accelerating. Similarly, the joys of financial freedom far exceed the momentary pleasures of buying all the latest toys. It is definitely worthwhile to persist.
How to benefit from compound interest in investing
- Start investing early using whatever funds available to you – even is it is just $100. Do not procrastinate as this holds you back.
- Learn to be content with satisfied with reasonable rates of return. If you want to chase high returns, it may cause you to take bigger risks with your money.
- Have a plan that allows you to save at least 10% of your take home pay for investment every month. Setting up an automatic payroll deduction monthly is an excellent way to accomplish your goals.
- Try to pay off your home mortgage as soon as you can. And if possible, go for an open mortgage with no prepayment penalties. The sooner you pay off your mortgage, the less interest you pay.
- Also, try not to put yourself in credit card and other high-interest debt. They could become compounding working against you.
Start investing early for your children, preferably at birth. Investing early enhances your compounding returns.
Check out the following calculator to see how the compound interest can be used to estimate the future value of current investments!