Wealthflow’s Dr George Callaghan clarifies why you should include the special sauce of compounding to a financial diet.
Imagine the scene: it is January the second and you have made a settlement to make healthier foods for yourself and your loved ones. Following a little online searching, you discover sprouts and spinach are an excellent means to get more nutrition into the family’s dietplan. You head to the supermarket and load up on flavonoid-filled greens, but you realize that you face a problem: how to make a compelling case to change family eating habits? You immediately reach for the full-fat butter, but then notice the red traffic lights on the nutrient content…
A similar dilemma is faced by financial coaches in encouraging customers to consider long-term savings and investments. Deferring satisfaction and thinking across decades is your money equivalent of eating your greens. Here, I’d love to explore how a better understanding of compounding might encourage more of us to pick our forks up and get stuck to long-term financial planning.
Compounding, the ability of cash to grow over time, is remarkably powerful. Its impact works because preceding interest or investment returns are added to the initial amount saved or spent. Of course, if you are also frequently putting additional funds in your savings/ investment marijuana this effect is considerably magnified.
The important variables here are the amount regularly saved or invested, the time horizon on this saving or investing takes place, and the rate of return. Which is the most important? Well, I would begin with the first two as those are those on which you have most control. If you begin saving and investing early and increase those amounts when possible, you’re doing everything you can to assist the process of compounding. The amount of return you receive will be dependent on where you put your cash — for example, into stocks or savings. Just how much these will reunite are outside your hands but it’s well worth recalling stocks have considerably outperformed saving yields over time.
And, needless to say, compounding doesn’t only work together with finance, it operates in several areas of life. Building knowledge through formal or informal schooling, becoming gradually stronger by going to the gym, adding kilometres as you work via a couch to 5K program and so on.
Thus, try to use the special sauce of compounding to make eating the financial greens of saving and investing to your longer palatable. Your future self will thank you.