While it is commonly understood that the habit of saving money regularly is a fundamental step in building your wealth, this step alone is insufficient. This is because the purchasing power of your savings is eroding every year without fail due to the inflation rate. Furthermore, savers are losers in modern economies, especially when the central bank in their countries have imposed a negative interest rate policy or near-zero interest rates to savings accounts.
Therefore, once you have saved the money, it is important to invest as early as you can. The earlier you invest, the more time you will have to allow your investments to grow at an exponential rate of return.
For example, if you invest $10,000 today at a 5% rate of return, after the first year, you will end up having $10,500. If you continue to keep your investment intact without withdrawing your earnings (the $500 you earned without doing anything), at the end of the second year, you will end up having $11,025. Notice that you have earned $525 the second year, which is $25 more than the earnings you have from the first year ($500).
This increment might seem small at first, but what if you hold your investments for 10, 20, or even 30 years, with earnings reinvested?
After 10 years, the $1000 you saved will accumulate into $16,288.94!
After 20 years, the $1000 you saved will accumulate into $26,532.98!
After 30 years, the $1000 you saved will accumulate into $43,219.42!
Notice that the earnings for every 10-year period increased substantially as compared to the previous 10-year period!
That is the power of compounded earnings through compound interests. Albert Einstein called compound interest “the greatest mathematical discovery of all time”. This is true partly because unlike the trigonometry or calculus you studied back in high school, compounding can be applied to everyday life. Furthermore, compounding can work it’s magic when given the luxury of time.
Therefore, the key to abundant wealth is to invest your savings as early as possible. If you can’t do it for yourself, try implementing an investment plan for your children so that they can kickstart their journey to an abundance of wealth. But for most of us, even if we are in our thirties or forties, it is never too late to practice the ideal habits of saving and investing.
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