Compounding is one of the most powerful forces in the universe. It's what has allowed people to build empires, invent new technologies, and change the world for the better. Compounding works on all kinds of investments, from real estate to stocks to bonds. It’s why you should always put your money into as many different types of investments as possible.
If you are investing for the long term, compounding will help you grow your money faster over time. And if you are investing for the short term, compounding will still help you grow your money faster by reinvesting cash that you receive now at a higher rate than future earnings will be earning on it. Let’s look at some examples of how compounding can work its magic in different investment scenarios:
How to use compounding to help you grow your money faster
The simplest way to see how compounding works is to take a big pile of money, make small investments every year, and see how much money you have at the end of 10 years. Now, try to do the same thing, only this time, make smaller investments each year. At the end of 10 years, you will have much more money.
And more money is always better than less money. Now, let’s apply this concept to your investing. Investing for the long term is great, but the longer you wait to make your investments, the more likely it is that you will miss out on the returns that compound at a higher rate over time. If you want to increase your money faster, then you should invest small amounts each year.
Invest for the short term
One of the most important factors to consider when investing is how long your money will be invested. This is important because if you put your money into a long-term investment that takes 10 years to come back, but you are dead or unable to take care of it by that time, then you lose out on all of the compoundings. With a short-term investment, your money is either going to come back to you or it isn’t.
A lot of your money is going to be sitting in the bank or your retirement account or your investment account. But the money that you are putting away every month into a short-term investment is going to be coming back to you soon. Whether it is 12 months, 18 months, or 30 months, your money is going to be coming back to you soon.
Invest for the long term
One of the things that can cause people problems with investing in the idea that they need to “save the money for a rainy day.” The trouble is that when you are thinking about rainy days and what you need to save for, you are probably not thinking about how much money you need to have. What you need to do is figure out how much money you need regularly, like every month.
When you think about saving for a rainy day, you are probably thinking about how much money you need on hand so that you can pay for a car repair or some other emergency. But the bigger rainy day you are thinking about is what you need to have saved up so that you don’t have to work for the rest of your life. And the only way that you can do that is to save as much money as you can each month.
Investing for growth
Another important factor to consider when investing in growth. If you are not careful, you can end up with a lot of money sitting in the bank or in your investment account that is earning very low-interest rates. The returns on your investments are what they are, and the return on your investment is what you will get once you sell them.
Final thoughts
There are a lot of different factors that can affect how much money you end up with at the end of the day. One of the most important factors to think about is how long your money is going to be invested. Different investments have different time lengths, and if you are not careful, you can end up with more money sitting in a savings account that is earning very low-interest rates that are not growing as quickly as they could be.
Posted Using LeoFinance Beta