Compound growth is an often reliable and secure way of expanding your wealth, by making an investment where the return you get grows and grows with each payout.
How? Well, today we’ll be discussing just that. What is the concept behind compound growth and its benefits? We’ll also be sharing some tips to help you make the most of your investment and what investment instruments you could consider to benefit from compound growth.
What Is Compound Growth?
Now, your second interest payment will be calculated by taking into account the sum of the original investment you made and the interest payment you received previously. This will keep on happening and as your amount grows, so will the interest payment you receive in return. Your returns will be making further returns!
As more time passes, not only have you accumulated a large sum of money, but you’re also enjoying a large interest payment periodically. Such instruments make great investments for retirement and offer much-needed security in old age.
However, that does not mean you HAVE to wait until your retirement. If you start early you can cash out early too and enjoy an early retirement.
To take a practical example into account, let’s say you’re setting aside $250 every month into a compound interest investment option for 20 years, with an annual rate of return of 7%.
At the end of those 20 years, while you would have contributed almost $54000 out of pocket, your total return would be close to $125,000!
The Benefits & Disadvantages Of Compound Growth
As with any investment instrument, compound growth can have benefits and disadvantages and it is vital that you, as an investor, know both sides before you make a decision.
Have a More Comfortable Retirement
With your returns on investments even earning further returns, you’re growing your investments and your wealth at a consistently accelerating pace. Your retirement can be a lot more comfortable if you invest in a compound growth investment option.
Interest rates reflect the economy, with higher interest rates coming around during times of inflation. With a compound growth investment option, you can take advantage of these higher interest rates and keep up with the cost of living and growing expenses.
Unless you’re using a tax-sheltered account, which is another entire discussion in itself, then you’re going to have to pay taxes on earnings from your compound interest.
Interest rates aren’t always easy to predict and with a changing market you can experience lower returns, but a return nonetheless. This variability does make for some degree of uncertainty, especially when you’re trying to calculate exact future returns.
However, you’re still going to get a return and you’ll be making exponential growth in your returns and savings for as long as you keep investing.
Top Investment Tips
First and foremost, you need to get smarter about your finances. Considering the economic climate we're in today, at a global level, the smartest thing you can do is ensure that you have money saved for difficult times. Thus, make it a point to always resolve to save money every month.
To make the most of compound growth, you need to start as early as possible. The longer you keep investing, the more money you’ll save, and the amount of the returns will keep growing too.
Dedicate a fixed amount every month from your paycheck to invest into your compound growth investment and forget about it. If discipline becomes difficult for you, find an investment option that doesn’t let you divest until a specific term is completed.
Remember that there are multiple options in the market, so if you can afford to do so, invest in different instruments so you can enjoy the benefits of compound growth through multiple avenues. This also allows you to maintain diversity in your investment portfolio.
Investment Options That Offer Compound Growth
You’ll find many investment options where you can enjoy compound growth. The most common option is a regular savings account, which you can access by visiting a bank.
It would be good to speak to several banks to see what interest rates they’re offering, the level of accessibility, and any other advantages you could enjoy. Banks run promotions from time to time to compete with one another, and you might find a bank offering a coupon or discount or some other benefit you could enjoy.
Another popular option is government bonds and they offer a great deal of safety. Government bonds would fail to offer a return under VERY specific circumstances, like the collapse of the government or some other political calamity.
Barring that, you’re looking at a very reliable and timely investment option that offers a good return and allows you to enjoy compound growth.
The Importance Of Speaking To An Advisor
While compound growth might sound like a fairly simple concept, it would always be prudent to speak to an expert before you make a decision.
Financial advisors in Canada, such as the ones at Eastport Financial, are highly trained and you as an investor can benefit greatly from speaking or consulting with one. An experienced financial advisor can explain the intricacies of compound growth and advise how you should pair your existing investments with a compound growth option or, if you're a beginner, how you should start investing and retirement planning.
Financial advisors can also help you improve your existing portfolio, helping you choose options that not only maximize your returns and wealth but also maintain the health and diversity of your portfolio.
Finally, financial advisors can be instrumental in helping you mitigate tax impacts on your investments, including options that offer compound growth.