How to Build Your Wealth Through Compounding

Saving is important for all ages, even more for young people. When you start saving when you are young, by the time you reach middle age, you will have a substantial amount that you can use to build a business or make an investment. When you are saving, you also need to save money in high-yield interest-bearing accounts such as fixed deposit accounts. You also need to compound your interest Compounding interest means when you receive money as interest on your deposit, you convert your interest to the principal amount. Apart from saving money, you also need to invest money. When you invest you will earn a better return on investment compared to the return on your saving. You also need to compound your return on investment.

Building Wealth: The Power of Compounding

Money makes money.

You spend money to learn skills and build knowledge, and you get a good-paying job and you make money.

You invest money to build your own business, and your business makes money for you.

You invest money in the market (buy stocks, invest in mutual funds ETF, etc.) and earn a return on your investment. 

The point is you need money to make money. If you don’t have money, you cannot make money. Does this mean you need a lot of money to make money?

Did Elon Musk or Jeff Bezos start as a billionaire?

Well, they started small, and then gradually built their wealth.

How did that happen?

Well, that’s called the power of compounding.

The power of compounding means, that you invest a little amount, you earn profits, you then reinvest your profits and earn more profits, and then gradually build your business empire. Elon Musk made $500 by selling a game when he was 14. Then he used the money to do something else and made more money, then he co-founded PayPal, sold his PayPal shares used the money to invest in other businesses. And now he is the world’s richest man.

While not everyone can become very rich, if you continue to compound, you will surely grow your wealth.

Improve Your Finances Through the Power of Compounding

If you belong to the lower class, you are struggling to pay for essentials, therefore, you might not b able to invest and improve your finances. If you are upper class, you already have a lot of money, therefore, you do not have a dearth of investment funds, you can invest whenever you want, wherever you want. However, if you are in the middle class, you have some money to invest but not too much to invest.

So, with the little money you have how can you improve your finances?

The answer is: start compounding your income.

What is compounding?

Compounding means you are reinvesting your profits. Let’s say you received $100 profits from your stock investment, instead of receiving $100 and spending money, you reinvest $100. Every time you receive profits, you continue to reinvest. When you are reinvesting, your portfolio will continue to build up. It might take a long time to build your portfolio, however, this is the most possible way to improve your finances by spending a small amount and compounding your profits.

You must understand the power of compounding over time. You need a lot of financial discipline in order to compound your profits, however, this is the only way to increase your income and wealth if you do not have a lot of money to invest.

How Can You Become Rich

If you ask people “how can you become rich?” most of them will tell you, that you either need to start a business or invest in the market to become rich. Are these the only two methods to become rich?

Generally speaking, you can become rich through two methods, one, you invest money, and your investment multiplies, and two, you start a business and your business becomes profitable. Well, this might be true if becoming rich is related to becoming a millionaire, or even a billionaire.

Becoming a millionaire, or let alone a billionaire, is not possible for most of us. However, if we have a house to live in, if we have a car to drive, if we have some savings, some investment portfolio, no debt, and we can afford to go on a vacation in Europe, we can still call ourselves rich. This kind of richness is possible for everyone if you know how to manage your money. 

You need financial discipline and a lot of patience to become rich. Financial discipline means you invest regularly, you cut your expenses, and you patiently wait for your investment to grow. You should limit your living expenses, including bill payments to more than 50 percent of your income. You should save at least 20 percent of your income that you will be using for investment later on, and 30 percent for emergency funds or wants and wishes.