Making Use Of Compound Interest

Posted by User Contributed

May 30, 2008

To have a compounding investment, you need only ensure that the interest you receive is re-invested into the principal investment. So for example, if you invest $1000 at 5 percent return, at the end of the first year you will still have your $1000 principal, plus fifty dollars earned interest, for a total investment of one thousand and fifty dollars.

By rolling each of your 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 forty years. If a young person 20yrs of age decides to invest just one hundred dollars 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% return 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 multiplication process. Further, if you employ leverage by investing in real estate, you can really magnify your returns over time.

Typically, 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 invest $40K to purchase a $200K house, when that property appreciates 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 original $40K invested.

It is definitely worthwhile getting educated about financial matters because if you apply sound knowledge to your investing, you can dramatically alter your lifestyle and retire years early. 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 Andy Fuehl, Dr. Micheal Teng, and William Bronchick amongst many others. You can check out Success University by accessing their two dollar 14 Day Trial membership via the peeling web page graphic in the top right hand corner of the page I linked to in the above paragraph.

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