The Secret of Successful Investing
Have you heard about the power of compounding interest?
Did you know that the famous scientist Albert Einstein once said that the power of compounding interest is the 8th wonder of the world? Why is that one of the greatest minds in the world concluded that power of compounding interest as 8th wonder of the world?
So let us guide you on your journey to understand what the power of compounding interest is. Once you understand how powerful the concept is, you will see how the money you invested can become a powerful income-generating machine. Read on to know more.
What is Compounding Interest?
Let's start by understanding what the meaning of compound interest is. According to Investopedia, compound interest is the interest on savings calculated on both the initial principal and the accumulated interest from previous periods. (“24 Best Compound Interest Investments (For Beginners & Pros in 2023”)
Interest on interest or power of compound interest, will make your money grow faster as compared to simple interest, in which the calculation is based on the capital only.
As the interest keep adding into the principle, your capital will grow faster. The longer you stay invested, the more powerful the power of compound interest will become in accelerating your money growth.
However, you will need to bear in mind that the power of compound interest will benefit you greatly in investment, but it’s the other way around with your debt as it would make your debt grow bigger if you consistently failed to pay the amount due.
It may seem confusing when you read it, but the concept of compound interest is quite simple. To make things simpler, there are only two things that you should focused on to reap the benefit of compound interest in your investment, which are:
Do not withdraw both your capitals and dividends unless there is an urgent need and
Stay invested for a long period of time.
To make things clearer, let us comprehend this example:
Ahmad invests RM5,000.00 and receives an average return of 5 percent annually. After 20 years, if Ahmad does not withdraw the investment and dividends, his capital can grow significantly to around RM13,266, in which RM8,266 is the accumulated dividends. Want is more surprising is that he did not need to do anything to get that much money. He only needs to watch his money grow and, in the meantime, to stay disciplined enough not to withdraw his money.
Did you know the amount would be even more significant if Ahmad consistently invested every month?
If on top of the initial RM5,000 investment, Ahmad has also invested RM100.00 per month during the period. Based on his added monthly investment, his money can grow to almost RM52,946, in which about RM23,945 is the accumulated dividends.
From the example, we can see that when the capital and dividends are not withdrawn for a long period of time, compound interest can become a powerful wealth-generating machine that can help you to build a solid foundation for you to build your wealth.
The power of compounding interest can help you to easily build your financial nest if you are discipline enough to invest consistently and have strong willpower to not withdraw your investments unless there is an urgent need to do so.
It’s a benefit you get to enjoy, without having to work hard, have you taken advantage of it?
Tips to build strong savings
Tip 1
Invest consistently and be disciplined in your journey to build your financial nest. Only withdraw your money if there is an urgent need or when the money is enough for you to materialize your dream.
Tip 2
Invest for the long term as the power of compound interest will not have any impact if you invest for a short period of time. Based on the Rule of 72 concept, you can estimate the time needed for your money to double based on the annual dividends received. For example, if you receive an average yearly return of 5% from your investment, your money will double after approximately 14 years (72/5=14.4).
Tip 3
Do not procrastinate when it comes to starting investments. The sooner you start, the better as the greater the number of compounding periods, the greater the compound will be and the bigger your money will grow.
Tip 4
Learn to differentiate between Bank Saving Account and investment account. Make sure that you put aside money for investment first and leave only what you need for your monthly expenses in your Savings Account. For example, put aside money to invest in ASB to enjoy the dividend. Keep your money low in saving account as it did not give any returns.
Tip 5
Practice the concept of invest first, spend later. If you wait until you have surplus or earn more to invest, then you will never invest, let alone to have thousands of Ringgit in your funds.
Tip 6
Finally, if you dream of having tens of thousands Ringgit in your financial nest, you need to start now by choosing to invest in ASB or fixed deposit, where you do not risk losing your capital and still enjoying yearly return. When you have more knowledge and your financial is getting stable, you can start to explore riskier investment options.
Getting started with investing is now easier with myASNB. For more details, visit https://www.myasnb.com.my/.
