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“How To Harness The Power Of Compounding”

 

The Power of Compounding

Useful Property Investment Strategy

Do you want to know the secret to increasing the value of your real estate investment property?

The effect of compounding has the power to exponentially increase the value of your investment property assets.

What is Compounding?

Compounding is the effect of interest being generated on funds not originally invested by a person. The longer that the money is invested, the bigger it will grow.

Another common term used to describe compound interest is Rate and Time. This is because the higher the growth rate and the longer the money is invested for, the greater the results will be.

So how does it work?

Here is an example.

A sum of money is invested and a percentage of interest is earned on the principal sum in the first year.

If you reinvest the interest earned, then in the second year, interest is earned on the principal sum and the interest from the first year.

In the third year, interest is earned on the principal sum and the interest from the first and second years.

The interest earned compounds on itself over and over again creating wealth faster.

Consider this. If you invested $1.00 every day for 47 years at 15% interest, you would eventually end up with around $2,500,000.00!

Just like investing money into a high interest bank account, investment properties also increase their value every year. For a more specific example of the compounding effect on investment properties please visit our Frequently Asked Questions page.

What does this mean for me?

The best way to calculate how compounding will work for your investment is to use the “Rule of 72”.

What is the Rule of 72? This says that to calculate the number of years that it will take for invested money to double is 72 divided by the interest rate.

Interest Rate

Years to double the investment value

72 divided by 5% 14.4 years
72 divided by 6% 12 years
72 divided by 7% 10.2 years
72 divided by 8% 9 years
72 divided by 9% 8 years
72 divided by 10% 7.2 years
72 divided by 12% 6 years
72 divided by 15% 4.8 years
72 divided by 20% 3.6 years

Interest rates have the power to drastically alter the outcome of an investment over a period of time. However, doubling the interest rate does not necessarily double the outcome. The end results can be far greater than that!

The capital growth of an investment property is extremely important as per the example below referring to interest rates on cash invested:

$10,000 invested for 10 years at 5% will grow to $16,288.95 and $114,674.00 after 50 years.

However, consider the outcome when doubling the interest rate.

$10,000 invested for 10 years at 10% will grow to $25,937.42 and $1,173,908.53 after 50 years.

The invested amount grows by ten times as much with only double the interest rate.

Time is important

A significant factor in making a good investment is considering the time that you will be able to invest for. An investment at 10% will double value in 7 years, quadruple in 14 years and be worth 8 times as much in 21 years.

Being able to invest over a long period of time is much more important than having lots of money to invest at the outset.

$1,000.00 invested for 20 years at 10% would equate to $6,727.50, which is a greater result than investing $2,000.00 at 10% growth for 10 years which would amount to $5,187.48.

Remember compounding interest is also called Rate & Time. The higher the interest rate and the longer that you are able to invest for will provide the most favourable results, which is why it is important to start investing in property as soon as you can. A person who starts investing in property at 50 years of age will have more work to do and will have to contribute more money to the investment to achieve the same results than someone who started at 30 years of age.

Credit Cards and compounding interest

Did you realize that credit card companies use the effect of compounding interest to increase and build their wealth and decrease yours?

Compounding interest accumulates on credit card debts that are not paid in full at the end of the month.

Interest will accrue on any debts not paid at the end of the month. The next month you will again be charged interest on interest.


The amount of interest paid by you compared with what you have actually spent on your credit card can become enormous over a few years.
Pay off credit cards every month to avoid being charged astronomical amounts of interest.

What is the effect on my investment if I don’t take advantage of compounding?

Taking advantage compounding interest, you invested $1,000 at 10% for 40 years. At the end of that time your investment would be worth $45,259.42. However, withdrawing the interest from the investment every year would only result in interest of only $4,000 having been earned.

The keys to good property investments are to start investing as soon as possible, ensure that you are receiving the best interest rate available and be prepared to invest in property for the long term. The longer the invested money has to compound, the better the end result will be.

Please contact S.E.QLD. Investment Property for more information about wealth creation.

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