Compound Investing: The Foundation To Building Wealth
A simple, fundamental strategy to creating long-lasting wealth.
What is Compound Investing?
Compound investing is the process in which an investment’s returns are reinvested to generate more returns over time. In essence, compound investing is the absolute foundation to building long-term wealth.
It’s crucial to start investing early and for the long term.
It’s also important to continuously increase your investments by contributing more money, if you are able to. Money that isn’t invested won’t make you more money.
Factors include the starting amount of investment, the subsequent investments and their frequency, the annual return rate and how often it’s compounded, and how long you’re planning to hold the investment.
Making Money with Compound Investing
Let’s go through several hypothetical investment scenarios:
If you are 20 years old and you invest $100,000 today, contribute an extra $500 every MONTH to your investment, and hold on to this investment for 50 years, you will have $6 million when you’re 70 years old (assuming a rate of return of 7% a year, compounded monthly).
In a similar example, if you are 20 years old and you invest $100,000 today, contribute an extra $500 every QUARTER to your investment, and hold on to this investment for 50 years, you will have $4.2 million when you’re 70 years old (assuming a rate of return of 7% a year, compounded monthly).
Let’s say you started out investing later on in life when you’re 40 years old and you invest $100,000, contribute an extra $500 every quarter to your investment, and hold on to this investment for 30 years, you will have $1.4 million when you’re 70 years old (assuming a rate of return of 7% a year, compounded monthly).
The investment scenarios illustrated in more detail below:
This is the power of compound investing. The sooner you start, and the longer you do it for, the wealthier you will be.
Major Takeaways
Start investing today and aim to contribute more to your investment on a regular basis.
You can invest in a variety of different assets, such as stocks, bonds, mutual funds and exchange-traded funds.
Over the long term, your initial investment, along with your regular contributions and your investment’s returns (which will be reinvested) will make you wealthy.
We hope this helps you become more financially independent.
As always, feel free to reach out to us if you have any questions. We are more than happy to help.
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