The Power Of Compounded Interest

Someone once said that the greatest power in the world is the power of compounded interest. This is the interest that is put on top of the principal so that the interest then starts earning interest. Through compounding, your money can grow much faster. If you want to become financially free then this is your greatest weapon.

Young people often put off starting a retirement account. They think that they won’t need to start until they are 30 or 40. However, this may be the biggest mistake you can make. Why? Because the best time to start investing for your retirement is NOW.

Now the question is how can you make use of the power of compounded interest? You can do this by putting your money in vehicles that can give you good interest rates. One such vehicle is the stock market. You do not have to invest huge sums of money. To start investing in the stock market you only need a minimal amount. Then you can slowly add to your investment each month. If you think the stock is too risky then you can play it safe and buy mutual funds instead. It has a lower interest rate but it is “safer” since there’s a fund manager who will be managing your investments. Then there are also bonds and T-bills.

There are actually many investment vehicles that you can use. It all depends on your preference and expertise. The most important thing is that you know what you are doing. Or if you don’t – find someone who does.

To maximize the power of compounded interest it is best to start early. When it comes to compounding time is your friend. The earlier you start the better. Investing at a young age gives your money more time to grow. Next, invest regularly. Make it a habit. Allot a portion of your income for your retirement fund and be disciplined enough to follow through. And of course, be patient. The power of compounding is only effective when you give it enough time to grow.

If you are not accustomed to saving and investing then this may seem difficult at first. As long as you discipline yourself enough to follow through and make it a habit, it will get easier with time.