Compounding Interest – Making Use Of It
Monday, May 19th, 2008 Subscribe To Our Feed
A compounding investment is one where the interest you are credited with is re-invested into the principal investment. So for example, if you invest one thousand dollars at five percent interest, at the end of the first year you will still have your a thousand dollar principal, plus $50 interest earned, for a total investment of $1050.
By re-investing each of your allocated interest income amounts back into your original investment, in other words allowing it to accumulate or compound, you produce a very powerful effect over time.
The average working life is 40yrs. If a young person 20 years of age decides to have just $100 per month of their income automatically invested each month until age 60, they would invest a total of $48,000 (($100 x 12mths) x 40yrs). However… if they had it invested at 10% interest and allowed their interest income to accumulate within their investment fund, they would end up with a nest-egg over ten times the size of their total investment amount and would reap a payout of over $584,000 by the time they reach age 60!
The period of time that your money has to accumulate, and the interest rate at which it is earning income, are critical factors in the compounding process. Further, if you use leverage by investing in real estate, you can really magnify your returns over time.
Generally, one can purchase residential real estate for a 20% down payment. If you follow investor Hans Jakobi’s teachings, you can even do it for no money down. But assuming 20% down, if you put in $40K to purchase a $200K home, when that property goes up in value 5% it will be worth $210K. That $10K is a 25% return on your $40K invested. Once the property is worth $300K and it increases another 5%, it will be worth $315K. You will then have generated a 37.5% return that year on your initial $40K invested.
It is definitely worthwhile getting educated about financial matters because if you apply sound knowledge to your investments, you can dramatically alter your lifestyle and retire years earlier.
One excellent source of financial education is Success University. Their curriculum includes dedicated sections for both finance and real estate from world experts such as Jay Abraham, Carol Tuttle, and Greg Reid amongst many others. You can check out the Success University courses by accessing their two dollar 14 Day Trial membership via the peelaway ad in the top right hand corner of the page I linked to in the above paragraph.
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