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Investing

3 Actions to Make Best Use of Compound Interest

Chris Lee Susanto, Founder at Re-ThinkWealth.com

21 April 2020

Compound interest is very powerful.

It is the interest you get on top of the previous principal + interest you already got.

Here are 3 actions you can take to make the best use of compound interest:

  1. Invest early – the earlier we invest, the more powerful the compounding effect becomes. By investing early, we will truly maximize the effects of compounding – so long as we stay invested for the long haul.
  2. Re-invest your profits – remember than compound interests are interests on top of your original capital + your interests. So in an investment point of view, it is your original starting capital + all the profits you already made from the stock market. By re-investing them, you are making use of compound interests to the fullest as you are building your base capital.
  3. Add more money – by adding more money to your portfolio, you are building your base capital. It will accelerate the impact of the compounding because the % return is built on a bigger base.

Rule of 72 gives you an idea of how many years it takes for your investment to double. Getting 20% a year, takes you 3.6 years (72/20) and getting 8% a year, takes you 9 years (72/8).

But remember, compound interest is good in theory. But if you lose money consistently on your investments or you cannot get a consistent rate of return over time, compound interest is useless.

This is Chris’s weekly take, which can found in VIM membership site at www.vimclub.sg.

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