In my recent posts, I have given some tips on how to build wealth with your income. Today, I will give more tips as regards to building wealth. In the first post, I recommended spending less than you make. In the second post, I wrote about what you do with the surplus you have from your income. That is, investing it. In this post, we will look at the effect of compounding as a tool to have wealth. I am writing this because only investing for the short term is not enough. You must invest for the long haul. Investing for the long haul implies understanding the power of compound interest.
The major difference between the wealthy and the others is that the first invests for the long term and delay gratification while the second only thinks about the short term. The reason is that the first group understands the effect of compound interest on investment. It is ironical that anybody that passes through primary school or high school studied compound interest, but it is only few that really makes use of it. In order to understand the power of compund interest, ask any good financial adviser to calculate how much you can have in a period of 20 years or 30 years, investing in even a conservative fund.
Recently, a famous financial adviser said that investing only $100 every month for a period of 30 years (period assumed for retirement) will yield $1.170 million. The same adviser did the calculation for investing $500. He concluded that $500 will give between $5 - $7 million. This means that you become a multi millionaire by the time one retires. So, think about it!
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