Why the Rich Always Gets Richer—The Compounding Effect

Why the Rich Always Gets Richer—The Compounding Effect

Many of us often wonder how and why the rich continue to get richer. We try to learn about their investment strategies and their methods of savings. But honestly, it is no rocket science! If you have the habit of saving regularly and know how to choose the right investment options, you will realize that the trick to making money is to start early and gain the benefit of compounding interest.

Tips to help you grow your wealth 

Whether you start on a low key or have enough money to support, some of the smart tips that will help you become richer are discussed below:

  • Start early

Whatever is your age, start saving from today. Starting early is the trick to making money at a later stage. Most parents teach the benefits of saving to their child at a young age. Every month, they set aside a certain sum of money without fail as they understand its importance. The habit of saving helps them in the long run and they get richer with practice.

  • Effective investing

Saving is the first step followed by effective investment. Once you begin saving an amount every month, it is important to invest it in the correct financial instruments in order to ensure that your invested money increases in value. There are a number of investment options available to you. Choose the one that is most suitable for your financial condition and will fulfill your long-term financial goals. In addition to wealth maximization, you may opt for investment avenues that help in tax saving. Understanding of different financial tools will help you determine the right investment option. To create the right risk-return balance, diversify your portfolio by allocating your money to different areas including mutual funds, government bonds, equity, and stock market.

  • Invest in stock market

If you have knowledge of the market, you may make monthly investments into the share market and benefit from its volatility. The prerequisite for the same is to open a demat account. You can start investing from your account into your choice of stocks. Remember, equity offers high returns only in the long run and the trick is to buy low and sell high.

  • Invest in mutual funds

You can choose to invest in an Equity-Linked Savings Scheme (ELSS), which is an equity mutual fund. In most cases, the fund manager invests a majority in equity as it has a higher return. ELSS has a three-year lock-in period. You may opt for a Systematic Investment Plan (SIP) for the same and avail of the benefit of compounding of interest with an ELSS fund. With compound interest, you will be able to earn interest not only on the investment you make but also on the interest component. Such compounding has a long-term benefit and you will notice a significant rise in the returns at the end of your term.

With the right knowledge of financial instruments, you can ensure that you are making effective investment decisions that will reap higher returns in the long run. Prioritize your financial goals and make prudent choices.


Categories: Wealth

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