THE KEY TO BUILD WEALTH LAYS BEHIND A SIMPLE FORMULA. IT SOUNDS LIKE SCAM, I KNOW
STARTING WITH LITTLE MONEY IS NOT A LIMIT, AND HERE WE’LL FIND OUT WHY
IF YOU’RE READING THIS ARTICLE YOU PROBABLY ASKED GOOGLE A SMART QUESTION, “HOW TO INVEST SMALL AMOUNTS”
INVESTING SMALL SUMS OF MONEY CAN LEAD TO VERY REWARDING IMPLICATIONS, IF…
How to become millionaire?
There are only few ways to become a millionaire and investing wisely is the main one.
Among the various methods that you have already read a thousand times, there is an underestimated tool that hides behind a simple mathematical formula. It is called compound interest.
Here we won’t talk about investing small sums in bitcoin, gold, startup or real estate
I wasn’t born millionaire so I’m happily forced to work and grow (by investing small amounts) my money.
My best allies are time and some simple but yet specific knowledge. (So if you are here looking for “how to become rich fast” my best wishes, leave this page because it will not help you…)
What is compound interest?
HERE IS WHY COMPOUND INTEREST MAKES MONEY GROW AND, THEREFORE EVEN SMALL AMOUNTS CAN GROW
Why compound interest works
Would you like to go all the way up to 1 million euros? Follow what I am up to tell you!
When it comes to calculating interest, there are two options: simple or compound interest. Simple interest means a fixed annual percentage.
Compound interest, on the other hand, means “interest on interest”, which is why investors who use it are so successful, because it grows exponentially.
Let’s compare simple interests and compound interests:
For instance, let’s say that I invest 10.000€ at 10% interest (simple) yearly.
10k€ / 10% yield / 1 year
After the first year, 1000€ will be added to my account. In the second year another 1000€ of interest will be paid to me, and the same will happen in the third year, fourth year and so on.
If I got 10% compound interest on an annual basis, I wouldn’t notice a big difference in the firs year. In fact I will receive just the same 1000€ of interest.
Year after year the compound effect multiplies
We are not talking about hypothesis, this is a well-known mathematical formula
In the second year, the 10% interest is calculated on the whole new balance of 11.000€, therefore not only on the initial 10.000€. It sounds like a detail, it isn’t.
It is surprising how quickly the figures are added up.
With a 10% interest my initial 10.000€ will become 67.000€ in 20 years. If I had used the simple interest I would only have gotten 30.000€.
There is a fair difference between 30.000€ and 67.000€ for the same capital and timespan. It’s more than doubled.
The following 3 factors can change my financial situation. These are the starting capital (or at least what I will be able to save periodically), the annual revenue and time.
If I can keep a high annual yield on my capital, I am laying the groundwork for the full power of compound interest.
This table shows how to grow a small sum into a Million
Note: the average return on stocks may only be expected over very long periods of time. The three revenue methods shown involve different levels of risk.
As we can see above, by simply investing a one-off sum of money and letting it mature (it’s a bit hypothetical but let’s go on) I could turn 11,000€ into 1 million €, in 40 years. Not only have I earned interests, but I have earned interests on my interests.
“When people learn this formula normally think: “why haven’t I just started before?” Truth is : it’s never too late. Compound interest works for the rich and the poor, it works the same way on as little as 10€ or million euros”
What I report here is the result of ⏳ time, research and experiments I do myself. If you find it useful just share it. It’s a genuine way to say thank you, and it costs you nothing.
Obviously the calculation in the table does not take into account certain factors such as inflation, and the fact that it is very difficult to obtain and maintain high and stable returns for such long periods without taking relative risks.
It’s a good idea, however, to start finding out how to get high returns right away. Let’s find out how other investors have applied these simple concepts in a broader strategy.
Magic Combination time/efficiency
Let’s do it with another simulation, a more realistic one.
This time I can assume that I will not start my race to the million just with a small initial capital, but that in the coming years, I will save (to invest) X euros per month.
Here is a basic example of the magic of compound interest formula. 400€ per month plus 20k capital.
Remember that the amount that I save and invest, and my time horizon, are only two of the three factors of the compound interest formula. The third factor is interest rate and is always tightly linked to the level of risk I am willing to face (for example, investing in equity rather than bonds, or peer-to-peer lending rather than savings accounts). Increasing the yield generally also increases the risk.
Mattress investing is risky
If I put my money under the mattress I would definitely lose value over timeDo I want to have 100% chance of losing money? Mattress investing is the right tool Click To Tweet
For mattress I also mean many cash deposits and bonds.
That’s why I don’t consider my mattress (and some savings accounts) as a safe place at all.
A certain gradual loss is still a bad investment even if my intention is only to protect my capital from inflation.
How do I get high yields?
Some say that the stock market is the best place to invest in the long term. The reason lies in the fact that in the long term, equity yields between 5% and 10%, depending on how it is calculated (coupons or not, 10 or 20 years, etc.). The truth is that volatility is very high, and not all “ordinary Joe” is able to handle the stress that comes from the market fluctuations.
Finding the right timing is also an issue. All in all, big investors such as Warren Buffett have created such wealth. Their investment methods are not secret at all , but there is a lot to test and study before acting.
Peer to peer lending, while much less volatile than markets, is not risk free at all. An economic downturn, a legislative change and a bad portfolio set up, can undermine the success of the operation and lower returns.
I’m interested in P2P lending at the moment because of the high potential returns. I’ve studied the topic in depth to control risks where possible.
Even the formula of compound interest I used for these calculations is not secret. There is a free app to download from the app stores.
Test yourself the effect of this formula on your own numbers. Click on the image to go to the calculator page.
I try to spread my capital on different tools, mainly stock market and Peer to Peer lending, but also Real Estate crowdfunding and some cheap and effective ETFs. I am not a consultant, I simply report how do I do it and the path that took me here. Knowledge is key and I wanted to share it.
Conclusions + 4 bullet points:
In short, how do I invest small amounts?
I search for a few good sources of revenue that suit my risk profile
I don’t spend my profits; I reinvest all that I can
Time is the multiplying factor
Share this article to anybody you know, it’s a cool way to say “thank you for writing”!
Ask a question, I am sure you have one
This blog has purely informative and educational purposes (disclaimer)
IMPORTANT NOTE: The indications contained in this analysis are to be considered mere information tools and are not intended to suggest or promote any form of investment. The ideas, concepts and everything I write about, are simply my opinion based on what I have studied and almost always tried myself. I am not an investment adviser, nor do I aspire to be one.
Read the full document on: revenue.land/disclaimer