Learn how to create wealth with compound interest - Quick start guide

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How To Create Wealth With The Extraordinary Power Of Compound Interest  

The power of compound interest is there for all to see. Over time an initial investment grows at a rate of interest, and then you can reinvest the principal amount and the interest that you have made to make even more money.  

What is Compounding?  

It is one of the best ways to build your wealth. The simple definition of compounding is where an investment that you make will create earnings for you. You will then be able to re invest those earnings so that they generate their own earnings.

It really means that you will earn interest on interest. This is how to earn even more money from your investment. You have an initial amount of say $5,000. You invest at a rate of interest of 5%. At the end of year 1 your earnings will be $250. You reinvest the principal $5,000 and your earnings of $250 and at the end of year 2 you have $5,512.50.

Now you might say that you have only earned an additional $12.50 from this deal. But the magic of compounding is the time that you keep reinvesting. For the same amount over 20 years you would earn $13,266.40 which represents a gain of 165.33%

As long as you do not touch the principal amount invested it will grow every year. Make sure that you go for compound interest deals rather than simple interest deals. With a simple interest deal you only earn on the principle each year. With compound you earn on the principal and the previous interest earned.  

How to Invest Money to make Money  

Itís all about being in for the long term. Yes there are some short term ways to make money but compound interest isnít one of them. It is best to start investing money into a compound interest account as early as possible. The longer your money is in this type of account the more it will grow.

You need to find out how your money will compound with the different types of investments. For a savings account your profit would be your interest income and if you invested in stocks then any dividends or capital gains would be your profit.

Find out just how long you can leave your money in an account to compound. Go for the longer term options here as you will make more money. Also be aware of your tax liabilities. There will almost certainly be taxes that you will have to pay on earned interest. There are tax advantages for investing in investment vehicles such as 401kís and individual retirement accounts (IRAís) such as SEP IRAís, Roth ORAís and traditional IRAís.

If you want higher rates of interest then you need to think about any risks involved. You will have no doubt heard the term ďno risk no rewardĒ and this certainly applies to returns on investments. With some compounding schemes there is a risk that rates could fall when you are looking for higher returns.  

Use a Monthly Investment Plan to Supercharge your Wealth  

Letís say that you make an initial investment of $10,000. If you were to then invest an additional $100 per month you will really harness the power of compounding to supercharge your wealth.

At a 6% compound interest rate you would have $34,582 after ten years with a $10,000 initial principal and then $100 a month after that. In twenty years this would be at $79,306. If you stick it for thirty years you will have made a total investment of $46,000 and your final compounded amount will be $160,677.

Even if you donít have an initial principal sum to invest you should still save smaller amounts each month in a compounding account. If you can save $100 a month without the principal then after thirty years you will have saved $36,000. At 6% compound interest you will be looking at more than a $100,000 yield.

If you think that the concept of compound interest is simple then you are right. It is simple. You just need to give it time to work in the best way for you. If you have several years in front of you then start to invest as early as possible. The best time to invest is when you are young, but if you are not young then the best time to invest is right now.

   

 

 

 

 

 

 

 

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