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Start Early for Compounded Success in the World of Investing
It is no wonder that investment is one of the best ways to learn the markets and earn huge returns. If you go through the profiles of some of the wealthiest people in the world, you will see that they gained such a fortune through investment. One such inspirational model is Warren Buffett, whose net worth is over $200 billion. He first invested in stocks when he was just 11 years old. You will be surprised to know Buffett filed taxes for the first time at 13. And when he was 30, he turned a millionaire. This is the power of a compounded investment.
His journey from being a simple boy in Nebraska to becoming a billionaire will inspire you to invest early, just like he did. But there is a catch! Warren Buffett didn’t get successful overnight. He had a proper strategy that helped him with the investments and yielded higher returns in value and quantity. Amongst most of his experiences and teachings, the most valued one is compounded growth.
Buffett has always focused on the power of compounding in the investment market. So, as an investor, you should learn what compounding is and how it can help you become a successful person later on. In addition, you should also know why starting early in compounded investment is a good sign.
What is Compounded Investment?
Before moving into the benefits of compounded investment or starting early in your investment journey, let us first understand what compounding means in the investment marketplace. Until and unless you have a clear description, you won’t be able to understand its importance and pay attention to it. So, let us consider an example of how compounding differs from conventional investment.
You invested $100 with a conventional interest rate of 10% annually. You do so for two years, after which you get a return of $20. Therefore, your total profit on a $100 investment Is only $20 in two years. Let’s try to invest in another way which is compounding. Here, the compounding interest rate is 10%, and the principal investment amount is also $100.
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Why is Compounded Investment Relevant?
Usually, in compounding, we consider the rate to be applied on the initial invested amount per frequency cycle. It means that if the investment return rate is annual, it will apply to the investment principal for every year throughout the Term. For example, if you invest for two years, the interest rate won’t apply to the entire invested principal for two years. Instead, it will be applicable for the first year on the initial invested amount, that is, $100, and then on a compounded principle for the second year.
At the end of the first year, you will make a profit of $10. This will get added to the initial sum of $100 and act as the principal amount for the second year. Therefore, in the second year, the 10% interest rate won’t be applicable for $100. Instead, it will be calculated at $110. So, your total profit from a $100 investment will be $21. This is the difference between conventional and compounded investments. This example shows that the profits earned from compounded investment will be much more than that of the conventional method.
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Why Should you Invest in Compounded Growth?
- First and foremost, the compounded investment grows with time. It means that the more you invest, the higher the returns will be.
- If you start investing in a compounded manner, you will be able to generate higher returns on the initial investment. The excess revenue generated can be used further to raise the invested value.
- One of the most significant benefits of compounded investment is high liquidity. The interest rate is applicable for each frequency cycle. You can easily withdraw your invested money after any cycle within the investment term ends.
- When you start investing from an early age, you will get enough time to compound the interest and generate higher returns. For example, if you start investing at 12 years while your sibling starts the journey at 20, you will have a head start of eight years. As a result, your returns will be much more than your siblings.
- Last, compounded investment is easier to maintain, especially if you want to invest in a complicated instrument like cryptocurrency or the forex market.
Now you know the true potential of compounded investment from an early age. It’s time to ask yourself whether you have invested in anything or have yet to decide. If you have already invested in something, you should stick to it and devise further plans based on the principles of compounded growth. Taking inspiration from Warren Buffett and his lifelong journey of becoming one of the wealthiest investors in the world, you will understand how compounded growth can open doors of more opportunities for you in the investment marketplace. Enroll in finance certification courses and kickstart your finance career.