Building wealth for the future is essential in this day and age if we want to be financially comfortable later in life. More than that, you need an independent source of funds to even enjoy retirement.
It’s important to start thinking about this early, even in your 20s! The reason is the immense power of compound interest – your money growing exponentially over time.
Put simply, compound interest is when the interest earned gets added back to the principal investment, so that interest earns interest on itself. This creates a snowball effect over decades. Even a small investment today can grow to a large sum in the future.
Let’s break this down.
What is Compound Interest & How Does it Work
Think of it like this – compound interest is a super hero! Its special power is “compounding.”
It means “to add to” or “augment” which means to “make greater, more numerous, larger.”
Let’s look at what happens when it comes to your first £50 in your new investment account. Over the first month, that £50 will be compounded by the interest it receives at the end of the month.
In simple terms, it’s the interest that £50 earns not only on your original investment, but also on the interest you’ve already earned.
It’s the interest itself earning interest!
It’s your money working for you. It’s your money building your wealth, thanks to the power of interest.
Use this handy compounding interest calculator to work out what £50 would build to in 1 year at an interest rate of 3%.
Start Early, Build More!
As you can see, your first £50 invested will already start growing substantially after one year.
Now just imagine how much you could end up with in 30, 40, 50 years’ time?
Well, you don’t have to imagine, use the calculator.
It’s a mouth-watering proposition isn’t it?
So, yes that’s why starting as EARLY as possible is a fantastic thing to do. Once you start, you’ll be wanting to add more to that initial £50.
And there’s no limit to how much you can add every month, or week even.
Think of it like this, each and every successful millionaire started this way. By putting a sum away and then building on that initial sum.
Of course, it doesn’t have to be £50. It can be as much as you can afford.
But there is a key thing to understand…
Be Patient, Let Time Work for You Too
Yes, the key to building wealth using the power of compound interest is to leave the money where it is.
Never touch it. Always add to it. Watch it grow.
There’s nothing stopping you opening a second or third investment account or as many as you like. As long as you can afford to.
These accounts you can use to save for specific things still using the power of compound interest in each one.
Maybe you want to save for a dream holiday. Call it your holiday account. Give yourself 5 years to save and invest for it. Again, use the compounding calculator to start planning your finances.
It’s all about consistency and making regular savings.
By saving regularly and consistently, you ensure a steady stream of funds that can compound over time.
You can even make it a habit – just like all the famous investors do. People like Warren Buffett.
Compound interest. Time. They are allies. A super hero wealth building duo!
Set aside money regularly. Weekly. Monthly. Whatever works for you.
Getting a Taste for it?
Then take it to the next level. As we referred to earlier, never touch this account.
This is your “future living” account.
The money that will help fund your lifestyle when you stop work. This is money that can make sure you live comfortably without financial worries or stress.
If you manage it right, you could even be financially independent within 10-20 years.
But the key is to nurture this account. Think of it as your child. You want them to grow to become sensible adults that can live independent lives.
You’re nurturing your money in the same way.
So leave it to grow. Never withdraw the interest. Let it re-invest itself.
That way you’re enabling your money to compound even more.
Grow at a faster pace!
What Else Can You Do?
Once you have seen the power of compounding at work, it’s hard to let go.
It’s like discovering your own secret gold mine. It’s the interest that keeps on giving.
So guess what – you might be able to find higher interest rates somewhere else.
Seek out opportunities that offer higher returns.
You can start looking at different investment options. There’s things like:
And many more.
If you’re keen to know more about this kind of investing, it’s essential to get some education.
There are online stock market courses you can go on or crypto courses.
These give you a good introduction to what is involved. You’ll soon learn that investing is something you can do regularly. It can take as little as 20 minutes a day or even week.
But you need to know what you are doing. Plus, you must always pay attention to research.
There’s a lot of things to remember, but it’s all very easy to understand. You don’t need a PhD that’s for sure!
That is the mindset you need. It’s the “millionaire mindset.” And it’s important to remember – building wealth through compound interest is not a get-rich-quick scheme. It’s a gradual, steady process.
It is easy to be tempted by short-term gains. Don’t be. Stay disciplined. If you find yourself about to dip into this special account, then something is wrong with your finances.
Take a step back. Pause. Reflect. Revisit your financial plan. Remember the principles of compounding and why you are using it.
Find another way to manage your money situation.
In fact, you can use this money management calculator
Don’t Sit Back & Do Nothing
While the power of compound interest is a wealth investment beast, you can’t leave it to do everything on its own.
Don’t sit back and be complacent. Keep an eye on your awesome wealth creator.
Remember, you are building for the future. You don’t want that building to fall short of your hopes or expectations.
You have to keep an eye on your investments regularly.
If building your wealth has become a habit, keeping an eye on your money will become second nature.
You may even wake up each morning and take a look at your account to see how much it has grown, before doing anything else!
In summary the power of compound interest is undeniable – it can help transform small, regular investments into substantial wealth over time.
The key is consistency, patience, and utilising higher return investments wisely. Start by opening a savings account today and setting up automatic deposits, no matter how small.
Let the power of compounding go to work for your future. With discipline and the right strategy, compound interest can help you achieve financial freedom and security for retirement.
Don’t wait – set goals, automate your savings, monitor your progress, and let the magic of compounding build your wealth. Your future self will thank you.