Patience is a valuable characteristic to have as an investor. Oftentimes, the most successful investors are the ones who are eager to save their money and are reluctant to spend it. The most handsome rewards also go to people who cultivate long-term mindsets for their investments.
In the case of investment vehicles that accrue compound interest over the years, the longer an investor waits to finally collect their prize, the bigger it will become.
At first, the compound interest that accumulates on an investment may not seem like a very big amount. But investors shouldn’t discount just how much money they can make off of compound growth if they are patient and careful with their money.
To illustrate the difference that compound growth can make—for both traditional investments and up-and-coming speculative investments like Monero (XMR) cryptocurrency that can be stored in an XMR wallet—here’s an overview on the topic.
What is Compound Growth and How Can It Be Achieved?
Compound growth is the result of choosing compound interest investments, which work differently from investments that derive simple interest. In the latter case, an investor waits for interest to accumulate on the principal amount of their investment.
Once the investment time horizon is over, the investor typically withdraws the final amount with interest and then uses it to fund something else.
But compound interest investments require a different approach. To achieve compound growth, the investor must keep adding interest back to the principal amount. When this happens, the principal amount will keep growing and, as a result, the interest will accrue on that increasing amount.
The longer the investment is left alone to accrue compound interest, the bigger the sum at the end of the investment horizon.
To illustrate, let’s say you invest $10,000 over a 30-year period and steadily compound your interest at a rate of 5% every quarter. If you don’t touch the money over the course of those three decades and simply let the interest build upon it, you stand to collect more than $44,000 from your original investment at the end of your long wait.
The big takeaway from this scenario is that the fruits of compound growth are most perceivable over long investment time horizons, like those that take place over decades. However, there are some caveats that you should take note of.
Just because you’ve chosen to compound the interest in your investment doesn’t mean you’re completely safe from risk.
As the years go by, the overall value of your investment may change due to factors like inflation. There’s also no telling how risk-tolerant you’ll be in the next ten or twenty years as compared to now.
At some point, you might even end up second-guessing your decision to put your money in a compound interest investment because doing so made you less liquid.
Still, it’s great to have compound interest investments in your portfolio as opposed to investments that rely on simple interest and that proffer only short-term gains.
The compound growth from these investments may be just what you need for your retirement or for the nest eggs you want to bequeath your children and grandchildren.
How to Achieve Compound Growth in Your Investments
Now that you know a little more about what compound growth looks like, how will you be able to reap the benefits of it from your own investment activities? Here are three tips that can guide you along your quest for compound growth:
Set Aside Money for Investing Purposes
First, you have to set aside money that’s explicitly for the purpose of investing. Determine how much of your earnings you want to put into your investment, and make sure that you can afford to leave the money alone to accrue.
If you lock away too much of your money in a compound interest investment, you might have to tighten your spending habits for your immediate expenses.
Decide on Your Long-Term Investment Horizon
Next, decide on how long you’d like your investment time horizon to be. This also means determining the rate of interest you want to keep putting back into the principal and how often you’ll compound it.
You can compound the investment on a monthly, quarterly, or yearly basis—whichever is most feasible for you.
Do Your Research on the Best Avenues for Earning Compound Interest
Lastly, do some research about the investment vehicles that are immediately available to you and find out which of them will allow you to accrue compound interest.
You can have your pick among traditional investment vehicles like certificates of deposit, high-yield savings accounts, government or corporate bonds, and real estate investment trusts (REITs).
If you’re willing to take the risk, you can even invest in more novel vehicles like compound interest cryptocurrency savings accounts. Choose in alignment with your needs, investing preferences, and risk appetite.
Final Words
The principle behind compound interest is actually quite simple: the most patient investors will be greatly rewarded for leaving their money alone and giving it time to grow. Consider this investment approach for yourself, and explore the options that you have for accumulating compound growth.
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