The Art of Compounding

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Today, we'll be discussing the concept of compounding and how important it is in your finance journey.

Compounding involves earning returns on both your original investment and the accrued interest on the investment; it simply means earning interest on your interest.

Compound interest applies to both an investment's initial principal and the accumulated interest from previous periods.

?For example, on January 1st, 2020, you invest $1,000 in a fixed-income product at 10% for a year; by December 31st, the value is $1,100, so without touching the money, you roll over the investment for another year at the same rate. By December 31st, 2021, the money is $1,210, and you keep this up for five years without touching the funds, so by December 31st, 2024, the money is $1,610.51.

Imagine leaving the investment untouched for 15 years. If all else is equal, its value will be $4,177.25.

?Try doing this exact computation with a larger sum and a higher interest rate and imagine how much extra money you would have made overtime.

In summary, the larger your investment base and the longer your investment period, the more your money grows. This is the power of compounding it is the wonder of investing; it helps you build wealth and attain financial freedom.

According to Napoleon Hill, in his book Think and Grow Rich, compounding is the secret to investing and building wealth. It doesn't rely on earning big returns. It is majorly "good returns sustained uninterrupted for the longest period of time."

The impact of compounding increases with the number of compounding periods.

This concept is essential when managing your finances and accumulating wealth for your future. It is one thing to be wealthy and another to stay wealthy. You must adopt this concept to build enough wealth to enjoy retirement and attain financial freedom in the future.

?It is not just about investing; what do you do with your investments? Do you allow them to keep running overtime, or once an investment matures, do you see it as extra money and spend it on luxury items and enjoyment? The whole point of investing is to plan for your future, letting your money work for you and growing it so you may live comfortably when you are unable to work. You invest to have a retirement plan for your old age, but the purpose of this will be defeated when you spend what you should have kept for the future in the present.

?Compounding helps you multiply your money and gives you huge returns after a long time. The essential thing about compounding is time. The ability to be patient and delay gratification is the only way to build and accumulate wealth.

?Investing helps you get wealth, but compounding your investment enables you to stay wealthy.

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