Compounding: How to let this powerful force grow your wealth

Julie Brownlee, Fsp Invest, 14 Jan. 2015

Tags: compounding, what is compounding, wealth, money, money management, personal finance, how to build wealth, how to grow wealth

Saving money and growing wealth come hand in hand. If you don’t save money, you can’t expect to grow wealth over time.

It’s one of the fundamental principles of wealth building.

The secret to making your money work even harder for you comes down to not spending it and continuing to save.

So how does this work?

Read on to find out…

To let this powerful force grow your money, you need to understand this…

Every time you spend money, you’re making yourself less wealthy.

If you want to become wealthy over the long-term, it’s essential that you view money differently from the crowd.

When you spend your cash, you stop its ability to compound for you. And this can have a big long-term effect.

What is compounding?

Compounding happens when you put your money into an investment that pays you a cash return. For example, interest on money in a savings account or dividends you receive from shares you own.

Instead of taking the cash you receive from interest payments or dividends, you reinvest it. You don’t spend it.

By doing this, your money grows faster. Your dividends earn more dividends. Your interest earns more interest.

Over time, compounding your returns works like a snowball. As the snowball grows, it gathers more snow, and it continues to grow.

Compounding is the secret to turning a small amount of money into a large amount of money. And it’s one of the biggest secrets of wealth.

To benefit from compounding, the longer you leave your money at work, the better.

The astonishing effect of compounding

Let’s take a look at an example of the effect on compounding...

You buy R10,000 worth of shares. These shares pay a 5% dividend every year.

In the first year, your investment with a 5% dividend yield, pays you R500. You use this money to buy R500 worth of shares.

In the second year, your investment is now worth R10,500 and still earns 5%. You’ll earn R525 in dividends, which you use to buy more shares.

In the third year, your investment is now worth R11,025 and still earns 5%. You’ll earn R551.25 in dividends, which you use to buy yet more shares.

Fast forward to the tenth year and reinvesting your dividends means you now have an investment worth R16,289. After 20-years, your investment is worth R26.533. After 30-years, your investment is worth R43,219!

That’s what compounding can do.

If you opt to ‘save and compound’ and not ‘spend and consume,’ you’ll see the effects on your wealth over the long-term, Brian Hunt in Daily Wealth explains.

So there you have it, how to let the powerful force of compounding grow your wealth.

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