Compound interest is one of the best allies of investors. This is really all about delaying gratification and setting aside money and letting it grow to more than double its value. Here are some basic guidelines for you to use compound growth to create wealth:
- Expect to invest your money for the long-term. Compound growth works if you don’t touch that money for a long time, such as until your retirement age. That’s why it’s best that you maintain, along with a long-term investment, an emergency fund that you could easily withdraw in case you need to. You would have to put it in a low-interest but accessible tool such as a typical bank account.
- Know how to choose a good investment program. You should take into consideration the reliability of the instrument that you are willing to invest your money on; remember that in a not-so-robust economy you would want to entrust your money to more conservative savings programs over higher-yield/ higher-risk ones.
Another factor to consider is the interest rates that this program offers. At the least, it should be more than the current economic inflation rate; otherwise you would simply be investing in an instrument that would let your money lose its value.
Some of the best places to invest your money for the long-term include an Individual Retirement Account (IRA) plan, your 401k plan, and affordable mutual funds.
Mutual funds are good in that your investments would be distributed over different investment tools, ranging from low-yield/ low-returns tools to higher-yield/ higher-returns tools. Professional financial managers are also in charge of investing your money; however, do be certain that you continuously check up on how your investments are doing.
- Know how much to invest. As a general rule, you should allot about $5,000 annually to your long-term investment. The younger you are, however, the less you would need to invest. The target is to invest a total of $75,000 throughout your career.
- Know how much returns to expect. Compound growth is very powerful in that setting aside even a relatively small amount will enable you to enjoy more than double its value, if you would be willing to wait until your retirement age to obtain it. One of the ways that you could easily compute for how much your money is expected to grow is to use the rule of 72. Here’s how it works: divide the number 72 by the annual interest rate of your investment plan. Say your investment plan grows your money by 8% annually, simply divide 72 by 8; the quotient (9) is the number of years it will take for your investment to double.
If you have managed to invest $75,000, in 9 years this amount will double, giving you $150,000. If you have 36 years left before retirement age, therefore, your money will be doubled four times (that is, 36 divided by 9), giving you a grand total of 3 million dollars to retire on.
Remember, the key to growing your wealth is to practice discipline as well as smart decision-making in order to set aside your hard-earned money and make it work. Just by being patient and disciplining yourself, you’d be able to create wealth that just might stagger you. So why not start investing your money today? Good luck, and hope this helped!