A compounding investment is one where the interest you are credited with is poured back into the principal investment. So for example, if you invest a thousand dollars at 5 percent interest, at the end of the first year you will still have your $1000 principal, plus fifty dollars interest earned, for a total investment of $1050.
By re-investing each of your allocated interest income amounts back into your original investment, in other words allowing it to accumulate or compound, you produce a very powerful effect over time.
The average working life is forty years. If a young person 20 years of age decides to have just $100 per month of their income automatically invested each month until age 60, they would invest a total of $48,000 (($100 x 12mths) x 40yrs).
However… if they had it invested at 10% interest and allowed their interest income to accumulate within their investment fund, they would end up with a nest-egg over ten times the size of their total investment amount and would reap a payout of over $584,000 by the time they reach sixty years of age!
The period of time that your money has to accumulate, and the interest rate at which it is earning income, are critical factors in the multiplication process. Further, if you employ leverage by investing in real estate, you can really boost your returns over time.
Typically, one can purchase residential real estate for a 20% down payment. If you follow Hans Jakobi’s teachings, you can even do it for no money down. But assuming 20% down, if you put in $40K to purchase a $200K house, when that property appreciates 5% it will be worth $210K. That $10K is a 25% return on your $40K invested. Once the property is worth $300K and it increases another 5%, it will be worth $315K. You will then have made a 37.5% return that year on your initial $40K invested.
It is definitely worthwhile getting educated about financial matters because if you apply sound knowledge to your investments, you can dramatically alter your lifestyle and retire years earlier. One excellent source of financial education is Success University. Their curriculum includes dedicated sections for both finance and real estate from world experts such as Jay Abraham, Carol Tuttle, and Greg Reid amongst many others. You can check out Success University by accessing their $2 fourteen Day Trial membership via the peeling web page graphic in the top right hand corner of the page I linked to in the above paragraph.