You've heard it at least a hundred times in your lifetime.
Compounding interests in investments is one of the surest ways to become rich.
And it's evident in one of the world's richest men: Warren Buffet.
Popularly known as the God of Fundamental investing, Warren Buffet was able to obtain enough money to become an accredited investor(someone with an annual income of $200,000 and above) very early in his life. This enables him to start early and build an 89 billion dollar mass of wealth.
Warren Buffets story is quite am intriguing one as at some point he wasn't earning anything personally from any of his investments, although these investments were doing very well.
But this post isn't about Warren Buffet. This post is about his greatest discovery.
In a few of my posts yesterday, I told you why I loved Tezos: Because it compounds interests for me.
The idea of compounding interests is simple. You simply invest your capital into a security, the security yields returns for you, and you proceed to invest those profits, along with your capital, back into the security.
Therefore, you are making your profits make profit, which in turn will lead to an endless string of your profits making you profits.
Then at some point, you could remove your initial investment from the security and invest it into another security, while your profits from the first security keep making you more money.
So if it's a great way to make more money, how come everyone isn't doing it?
Because it takes a very long time to realise great interests. Especially if you're inpatient.
Let's look at am example of how great this method of investing can be.
Say you're a plumber, and you don't have a lot of money to spare.
But you have saved up $10000, and you wish to invest those dollars into a security that pays you a meagre 2% per month. You wish to do this for 10 years, after which you retire and live off your money.
Let's also assume that you compound your interest only once a month, because you're too busy to keep track of it.
At the end of the 10 year period, you would have gotten 2411000 from your initial investment(this figure is rounded off for both our sanity's sake)
You would have become a millionaire simply by compounding your interests.
Now not every investment can look like this. Many factors come into play, such as which security to invest in, fluctuations in your yearly rate, or inflation eating up your capital. But in a vacuum, you'd be a millionaire in 10 years. It doesn't sound very possible, given you started with only 10000 USD.
That is the power of compound interest. And it is why I encourage everyone to start early with it.
So which securities do you invest in?
This is entirely up to you. You could buy bonds with high interest yield and compound the interests yourself, or you could have a financial manager do it for you at a price.
You could invest in slow moving stocks on hope of curving volatility and keeping your initial investment safe.
You could also invest in crypto, if you have a problem with keeping your money intact and you love the thrill of seeing $10000 fall to $500, and rise back up.
But the point remains that compounding interest is a very powerful tool that everyone should use.
Thanks for reading!