If you’re like most of us, you probably would like to have a lot more money with a lot less effort. Fortunately, there is an easy way to do this if you are ready to learn how to put your money to work for you. This is called compound interest, which is calculated on your initial capital and also on the interest accrued from previous periods. It is this âinterest paid on interestâ that causes the snowball effect – or compounding – that quickly makes your wealth grow.
To get the most out of capitalization, just follow these three simple rules of building wealth.
1. Focus on saving in the first 10 years
When you’re younger, it’s not so much about the type of investments you hold, but rather about saving diligently. âMutual funds or stocks? It just doesn’t matter much at this point, âsays Certified Financial Planner Janet Gray. “Just having a savings account means you’re in the game.”
This is because in the beginning, your savings will be the main way to make your money grow. âSo don’t focus on being an investment expert from the start,â says investment manager Dan Bortolotti. âFocus on a frugal life and even add small amounts, like an extra $ 50 or more per month, to your savings. It lasts a lot over time, so be patient and focus on the savings.â Over the course of time. from those early years, just celebrate the fact that you actually have the money and are growing your wealth in a disciplined way. “You’re way ahead of a lot of people,” Gray says.
2. Be patient
Return on investment is greatest towards the end of your savings years. So while compounding is a powerful tool, decent compound interest results take a very long time to appear, often over 25 years. But be patient. It is in the later years of a savings plan that investment returns overtake savings as the primary driver of your portfolio growth.
âIn the beginning, your savings will be a key part of building your wealth, but over the following years the return on your investments will play a more important role in the growth of your money,â explains Bortolotti. âThose gains from funding can often be huge compared to what your savings are. “
So over the last few years you will see big gains by focusing on reducing investment costs and sticking to a good investment strategy. This is when it will pay off the most. Of course, the higher the return on your investment, the faster your money will grow, but in recent years even a solid annual rate of return of 3% or 4% will yield impressive results.
For example, if you’ve saved for 25 years and have a million dollar portfolio, a 4% ROI will earn $ 40,000 per year. If you keep that $ 40,000 in your $ 1 million wallet and don’t add a dime more for five more years, after 30 years you will have $ 1,216,654, or a total of $ 216,654, coming from mainly returns on investment over the past five years. You no longer need to save your own money, as the snowball effect will likely take care of your savings goals for you.