Investing can help make a dream come true, but not everyone is knowledgeable enough to make money from trading.
And what to do?
The magic of capitalization increases numbers to high values very quickly. Of course, it also works with money, but a little slower. This is called compound interest, and that’s what we can use now, no matter how deeply you understand investing.
The most frequent advice in the financial field is to accumulate their funds and invest them as soon as possible. When you start accumulating as early as possible, time is on your side, and compound interest accumulation plays a big role in this. The best way to demonstrate compound interest in action is the following example.
There’s Louis and Jen both 20 years old. They are given the opportunity to make a long-term investment with an initial capital of $5,000 at 10% per year for the next 45 years. And they have to make a decision:
1. Collect annually the accrued interest or
2. Reinvest interest income annually.
Louis likes to get paid. He already has ideas on how to spend the first interest payment. Nevertheless, Jen is looking to the future. She decides to reinvest them.
Louis invests their funds and receives the same income of $500 each year.
Louis is happy to take their $500 each year. After 45 years, nothing changes for him. Still has their original 5,000 original and 45 years of interest earned.
the power of compounding
Jen She is obsessed with savings. She knows that over time, her interest will bring her much more money.
The first few years of compounding are pretty boring, but Jen wait patiently, because every year their interest income is higher than before. Little by little, but the snowball effect is gaining momentum.
Around the ninth year, the picture becomes fascinating. Jen earn enough interest income to double your first deposit. Soon, the interest income exceeds the amount of your initial investment of $5,000. And you receive a percentage of your interest. This is the power of compound interest.
imagine what Jen could have done if he had put $5,000 into work every year for the same period of time. Currently, 10% seems too optimistic, but take, for example, that he earned 6% per year on this money. At this interest rate, the total income of Jen it would be $1,196,363 (by the way, at a 10% rate, your total income would be $4,318,429).
Rule 72 is a simple way to estimate the time it takes to double an investment based on a fixed rate of return. If you divide 72 by the rate of return, you’ll get an approximate number of years over which the investment will double.
For example: If you invested $1,000 at 4% per year, to turn your investment into $2,000, you would need approximately 18 years (72/4 = 18).
Using this formula, you can also determine the rate of return needed to double your money in 10 years: divide 72 by the number of years, 72/10 = 7.2%.
Regardless of the investment instrument, whether it’s bond yields or dividends, Rule 72 gives you an idea of how long it takes to double your money at a given interest rate.
Don’t let it work against you!
no matter how good it is see capitalization, there are 4 factors that weaken it and work against it:
• Inflation. There are ways to avoid or reduce this risk;
• Tax. Taxes eat up profits, so use accounts with tax advantages such as IRA and 401k;
• Spent. For example, taxes, fees, and commissions also eat into earnings. The less you pay them, the better;
• Weather. The longer you wait, the less profit you will accumulate under the compound interest system.
Basic math concepts do fun things with money over time. In the early stages, compound interest works slowly and generates little income, which is probably why many people ignore it in the early stages. But once it starts, it speeds up exponentially the more you let it go. If you don’t have a billion dollar idea in your mind, then compound interest is the best thing you can use to increase their funds and achieve wealth.