To understand compounding is to understand the power of longer-term accumulative growth. To utilise the power of compounding people need to understand the power of longer-term gains. Today’s society often wants quick results with high returns, often this involves investing in highly volatile areas in order to take advantage of the massive changes.
Many smart investors have won big with such strategies, more often than not however these same risk-takers can lose any gains as they gamble large sums with more uncertainty and volatility. Smarter investors with a longer more patient outlook normally choose more consistent returns for with less risk for higher accumulation over the longer term.
With compounding interest not only do you get interest on the initial principle, you also get paid interest on any interest you have also been paid. Many people understand interest in terms of a direct stack of coins, when you get paid it simply adds onto the top of the coin stack. With compounding however your wealth is growing based on your total wealth.
In other words, if you had a pile of coins, the mass would be added to the total area not just the very top of the pile.
If you have $100,000 and you invest it at 5% without compounding you would simply make a $5000 return.
If the total was compounding monthly then you would have received interest payments each month. So after 1 month, you would have $100,000 plus $416.66 in interest.
This means your new total is now $100,416, you would now be paid interest on the new greater total. In other words as your investment value increases, you get paid interest on the full increased value.
This is why just a few extra percentage points can make a very significant impact on your ability to accumulate interest over the longer term.
Albert Einstien once said that ‘compounding is the most powerful force in the universe’.
By investing in appreciating assets that have been proven to increase in value over the longer term, can potentially allow for fewer fluctuations and a more consistent rate of accumulation. Wealthy investors have known this for a long time, thus why investing in assets such as land, gold or precious metals is generally a more reliable investment knowing that supply is limited.
At Integral Wealth Group, we show people how normal Australians can access these types of preferred asset classes without taking on debt.