Compounding your money allows you to create wealth and financial freedom and is a key part of learn trading and investing.
Compounding your money simply means getting some gains on your trading and investing and re-investing those gains immediately so that your money is working harder each time.
Compounding your money is simple but not easy!
Compounding your money is a simple topic to grasp but it is not easy to perform.You have to resist the urge to spend your gains -do without the new car, nice house and latest smart phone.
You have to be single minded in reinvesting your gains and start compounding your money and not spending it on trinkets. Obviously you will have to budget for life’s necessities food, housing and warmth etc. But any money left over at the end of the month should be added to the investment pot – not easy is it?
But to create real wealth you will have to go without at the outset.
Let me give you an example:
What would you rather have, £1 million now or a penny today which will double in value over the next 28 days i.e 1p today, 2p tomorrow, 4p the next day, 8p the next day and so on for 28 days.
I think most people would take the £1 million today – buts lets do the arithmetic in the table below and we’ll see the real power of compounding your money:
|Day number||Number of Pennies|
After just 28 days you have amassed the grand total of 134217728 pennies, or £1,342,177.28, that’s £1.34 million! Do you still want the £1 million? Remarkable isn’t it – Einstein called compound interest the eighth wonder of the world!
You may be thinking that’s all very well but doubling your money every day is unrealistic. So lets consider some more realistic scenarios.
If you started with £2000 and made 3% per month you would have £397094 after 15 years.
If you started with £3000 and made 3.5% per month and added an extra £150 per month to the pot then in 15 years you would have £3,437,587 – not bad eh?
This is the power of compounding, and this is the way to build your wealth over the next few years.
Rules for compounding your money.
- Start as early as you can – time is crucial when it comes to compounding
- The calculations above are just 15 years. Imagine what happens in 25, 35, or 45 years!
- Always keep adding to the pot – every month if possible
- Always re-invest the profits, don’t spend them
- Get as high an interest rate as possible
This is the slow, steady but sure way of creating wealth, the quiet path to financial freedom.
In the next lesson we shall look at the financial markets.