What is compound interest/return?
The compounding effect is one of the most powerful formulas in the universe as quoted by Albert Einstein “Compound interest is the eighth wonder of the world”. Even though it’s so powerful not many people take advantage of it.
Compounding return (interest) simply means investing back your earnings in the form of dividends, capital gains or interest. As these added back to the original principle, they generated more return as the additional income generated their return. The example is best discussed with the following example.
Example:
An initial deposit of $100 is invested into the stock market generating an average of 10% per year. In year 1 the initial investment of $100 will go to $110 ($100*10%+$100), the year 2 will be grown to $121 ($110*10%+$110) and so on.
How to take advantage of compound return to become a millionaire.
1. Start early as as possible.
2. Save every dollar, especially in the initial years.
3. Consistent contribution is very important.
4. Income generated from investment needs to be contributed back into your principal amount to enjoy exponential returns.
5. Be patient, the exponential effect is slow in the initial years, but as the years pass the upward curve gets very steep.