Critical Success Factors for Wealth Creation
In today’s posting I discuss some critical success factors that enable you to maximize returns based on compound interest on your investments. Enjoy the reading.
- Time– Compounding is every investor’s best friend because it basically suggests that the sooner you start, the sooner you can get your money working in your favour. The longer your money can remain uninterrupted, the bigger your fortune can grow. In USA for example people place their funds in Mutual Funds (or Unit Trusts) which are indexed to the Stock Exchange rather than buy individual stocks and leave them for the long haul with regular dividend reinvestment.
- Frequency– The frequency of compounding is critical. As stated in a previous posting if investing you prefer more frequent compounding e.g. quarterly whereas if its debt you prefer less frequent compounding e.g. annually. In other words, you earn interest on interest frequently. Regular reinvesting of your yields would increase this compounding effect. Imagine developing an investment scheme whereby you lent your money against suitable security to a microfinance company and they gave you a return of 2% per month. Then you decide to reinvest most of the monthly returns monthly to increase your capital. You start earning interest on interest on a monthly basis. This accelerates your wealth creation. But remember to keep the security provided against your funds current and valued at the amount you placed with them.
- Interest rate– Obviously, the higher the interest rate the faster your money grows. Doubling the interest rate more than quadruples the result. Obviously places like Zimbabwe with higher interest rates are great investment destinations from a return perspective based on compound interest. The returns one gets from the Western world will be lower. For example a return of 6% p.a. is considered fair but this implies your money doubling in 12 years through compound interest whereas if one invest in Zimbabwe at an 18% p.a. basis the funds would double within 4 years. So if I was to disregard security of funds Zimbabwe would yield better investment returns. As a matter of fact many investors are slowly realizing this and moving funds towards Zimbabwe.
- Regular investing– Finally to make compounding work for you is to save regularly. If you can put away money every month and be consistent about it, money grows that much faster. Consistency is key to the process. It is therefore critical to set up a dollar cost averaging investment scheme as was discussed yesterday. If you have an earning capacity that allows you for example you can place a stop order for an investment amount to be sent straight to your investment account whether with a Stock broker or wherever.
Compound interest is very powerful when you understand it. One can manipulate any of these four criteria to accelerate one’s wealth creation pace. I trust that you are absorbing these lessons and beginning to finds ways to implement them. Knowledge without action will not change your financial state.