Tuesday, April 12, 2016

How to get your money work harder: The power of compound interest

photo credit: investopedia.com
Every investor is looking for investments that pay more over the shortest time possible with low risk. In the course of maximizing returns, some turn to endanger the funds due to the risk attached to high return investments. Others in the quest to minimize risk turn to miss the opportunities of making high returns.
So then, how can you still make more money and still avoid risk as much as possible? It's simple -Make every cent, kobo, pesewa you earn work harder.
Some of you work so hard but you make your monies slack off. I will be bold enough to say that most young business men and women go through sleepless nights to remain profitable. Even people staying at home and not working go through a lot of stress just to keep the house in order and the family happy. So why would you make your money sleep or rest? Why would you rather prefer to pamper your money than get it to work?
Well, I am very sure by now, most of you would say, “Oh but I invest” meaning my money works for me and that’s enough. Just know that, it’s not enough. If you begin to see investment as a culture, a lifestyle, you will make sure every penny is working harder at every time.
And why we invest, we forget how powerful compound interest is and hence jump from one investment to the other and only relying on simple interest.-How much I will make from this investment today. We often don’t take note of how much we will make from this investment when we reinvest what we got from this investment yesterday, today and then reinvest what we get today, tomorrow and the day after.  
source: batr.org
Young investors just look for one-shot investments, make their money and go away. They miss the power of compound interest. When I brought this up among some funny friends, they cited the DKM experience where investor who wanted to compound ended up losing all their monies. That is not the sort of compounding I am talking about. Suppose you found a safe investment giving you 12% interest per annum on your Ghc 400. In 7 years time, with simple interest, your investment will earn 400 x 0.12 = Ghc 48 every year and that will amount to Ghc 336 by 7 years. However, if you use the power of compound interest by investing the principal and the interest, you will double your money in 7 years by getting Ghc 484.27 extra on your Ghc 400 investment. The difference is (484.27-336 = ghc 148.27). If you think ghc 148 is just a small difference, just add 4 zeros to it and see what you will lose or gain by making your money work harder or not.
You don’t need much to become very rich in the future. You just need to allow the money to work and allow time to pass. To take an extreme case, suppose one of your more frugal ancestors had invested Ghc 5 for you at a 6% interest rate 200 years ago. How much would you have today? Let me help you, it will become Ghc 575,629.52 today. But wait a minute, notice that, the simple interest is just Ghc 5 x 0.06 = 0.30 pesewas per year. And then 0.30 pesewas X 200 years = Ghc 60. So where from the huge amount…. That is the Power of Compound Interest.

My advice to you is to take advantage of these high interest rates we have in the Ghanaian economy. The Bank of Ghana keeping the policy rate at 26% should only make you put more money to work and make sure you roll-over your principal and interest. The 91-Day treasury bill is around 22% and that's a good thing. Go for it. Constantly keep every penny working hard and if you wait long enough, it will always be beneficial to invest.

photo credit: pfguru.com

LinkWithin

Related Posts Plugin for WordPress, Blogger...