Wealth Building Info Article:
Financial Intelligence - Compounding (The Ninth Wonder of the World)
Compounding: The Ninth Wonder of the World
By Nicola Cairncross
Compounding is often described as the ninth wonder of the world. It is a concept that initially sounds quite dull, but when you understand how compounding just quietly works itsmagic - or conversely its naughtiness - it's a very exciting concept to grasp indeed!
Compounding is the difference between linear and exponential growth, or put more simply, about earning (or incurring) interest on the interest on the interest, generated by yoursavings (or your debt). On an energy level, it's about making sure that every little bit of effort you expend, works on many different levels to bring a reward greater than the originaleffort required.
It's a very powerful tool and can be likened to the wind under the wings of a jet. The plane creeps slowly, slowly along the approach runways, then moves into position, thenstarts down the runway slowly, but as it picks up speed, the power of the engines and the wind lifts its wings and it takes off, climbing very quickly and steeply into the sky.
Compounding can turn just one - just one - £1 or $1 into a million pounds or dollars within 20 years. If you took £1 or $1 and achieved a 100% return on your money each year(put another way, if you doubled your money each year) then you would most certainly be a millionaire in your lifetime. Imagine if you added another £1 or $1 each year - how muchfaster would that get you there?>
And if compounding is that powerful when applied annually, how much powerful could it be when applied monthly or even daily?
On a personal finance level, most people ignore the potential of compounding, because the % interest rates we are quoted by the banks, other savings vehicles and financialinstitutions are so paltry. If you took your pound or dollar and increased it at the usual 3% or 4% per annum, then it would grow so slowly that we might as well not bother savingat all. You would be dead several times over before your personal wealth increased noticeably.
I know I used to feel like that! Why save now, I thought, especially when you are only saving to spend later, and when you can only earn 3-4% per year on your savings? I wantto share with you, today, some of the exciting things that I learned about the power of compounding, things made a huge difference to my thinking about money. And changed mefrom a non-saver to an investor in one fell swoop!
There is a huge difference between saving and investing, and experienced Investors achieve returns on their money between 30% and 100% per annum - some even manage toachieve an infinity return on their investment, because they are able to pull their own money back out of the deal, which means that they are making money with no money! Theseare the supermodels of the investment world!
On a personal finance front, even looking at the returns generated by investing in property over the years (12% per annum) and the stockmarket (14% per annum) gets a littlemore exciting. The compounding effect means that, on average, property doubles in value every 7-10 years - that's a thrilling thought! How would you plan your property investmentdifferently if you knew that to be true?
There is a great example of the difference in what you can achieve in just two years, if you invest £60,000 (or dollars! I'm going to work in pounds now but the principle is thesame!) by buying outright one small rental unit, versus what you would achieve if you invested the same £60,000 in deposits on several small rental units.
At the end of the two years, if you just bought the one unit, and assuming average rates of growth, you would be worth £6384 more than when you started. But if you investedin deposits on several units, you would be £56,304 better off. You choose. That's compounding at work.
On a business level, compounding can work for you too. The difference between what you can earn if you are a solo self-employed person, and what you can earn if you build abusiness consisting of a team of "you's" is quite amazing.
The compounding effect can also be utilized in your business by automating as many of your business processes as possible. Think of the potential difference between having theservices of one marketing person and one sales person (both of whom can only work so many hours in a day, both have to be paid, even when they are on holiday or off sick, so notworking) and then consider the possibilities of having an automated marketing machine working 24/7 plus a team of affiliates - unlimited numbers of independent people who are allbeing paid a little bit, on sales (results only!) to promote your service or product.
Nicola Cairncross is a specialist Wealth Coach, Hotel Owner and Internet Entrepreneur, working with bright, entrepreneurial people to enhance their financial intelligence. Visit herwebsite at www.nicolacairncross.com.
If you would like a more detailed copy of the flats investment example in this article, just email flatsexample@nicolacairncross.com).
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