Compound returns: The number one strategy to wealth

Fsp Invest, 16 Jan. 2014

Tags: compounding, wealth, strategy, investing, investor, compound returns, how compounding works, money, strategy to wealth, how to build wealth

By embracing this strategy, you'll be on the road to riches. Ignoring it and getting lazy about using its power means you'll never have a chance for the lifestyle you want. The secret is not hard to grasp. You just have to understand a few simple principles. But as you might imagine, it does take some time and a little effort on your part. And you have to start taking advantage of it right now. Read on to find out more about compound returns…

If you're not sure what compound returns are, don't worry, Dr David Eifrig in Daily Wealth explains...

It's easy to understand and a powerful tool when you put it to work.

Simply stated, compound returns are money you make off the money you make. And the more money you make, the more money your money makes off the money your money makes.

Imagine you're 37 years old, have a R10,000 savings account and your investments are earnings 18% a year. If you make consistent 18% returns, what will happen to your portfolio by the time you retire at the age of 65?

You'll have earned a million rand.

How compounding works

The numbers are simple: If you start investing with R10,000 at the end of the first year, you'll have about R11,800 (not including taxes or fees). You made R1,800 on your initial investment.

But in your second year... you're not starting over at R10,000. The R1,800 you earned in the first year will be making money for you, too. So assuming gains of 18%, you'll have earned another R1,800 on your original capital plus another R324 on the profits from the previous year's R1,800.

You're not just multiplying R1,800 times 25 years. (That only gives you R45,000.) Where does the other R903,000 come from? That's the secret. The money starts making money on top of itself – your money is compounding.

The money you make in the first year, in this case R1,800, starts making money in the second year, third year and so on... It continues this way for every stream of money you compound. So the R1,800 you make in your second year also makes R324 in the third.

But there's more. The R324 you make in the second year generated by your first R1,800 now makes R58.32 on itself in the third year.

And the money just keeps building. By age 65 (28 years of compounding), it totals nearly R1 million. And if you wait another few years, until age 68, the compounding effect starts to explode. At that point, you have almost R1.5 million.

You can see why this secret is so powerful. By ploughing your earnings back into your portfolio, you can get your money working for itself and amass a fortune from your initial investments.

So there you have it, compounding, the number one strategy to wealth.

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