If you want to become wealthy, you will need to understand the power of compounding.
It’s the very root of making money work for you and happens when you let the earnings of an investment compound instead of withdrawing them and spending them.
For example, if you had $10 000 in an interest-bearing account and it earned 3 per cent interest ($300), you would be practising compounding if you left the interest in the account to grow further.
This means you’d now be earning interest on $10,300, not just the original $10 000.
This keeps building year after year and it’s much the same with property.
Just look at the following graph which shows what would happen to the value of a property that grows in value at 7% per annual (of course this is an average – it doesn’t happen each and every year.)
While this property doubles in value over 10 years,the power of compounding means that almost half (45%) of its increase in value over the 15-year period shown occurs in the last 5 years.
Once again, timing is nowhere near as important as owning the right type of asset and holding it in the long term.
By Michael Yardney September 2022
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