Invest regularly and take advantage of the compound interest effect
July 3, 2023 News
At first, the notion of creating a high financial reserve seems impossible. However, if you invest regularly and long-term, you can accumulate a surprisingly large sum of money out of those small, regularly invested amounts.
Is your plan to save enough money for your retirement? Or for your children’s studies? Help them get their own place to live? Whatever the case, it pays to start setting aside part of your income as soon as possible and invest this money well. To get the most out of your savings, however, you need to choose suitable investment instruments.
What to invest in, then?
Seasoned investors recommend distributing money mainly between stocks and fixed-rate securities and instruments such as P2P and P2B investments. One can also include various alternative investments, such as precious metals, cryptocurrencies, art and the like. The weight of each asset in the portfolio then depends on the planned length of investment (i.e. investment horizon), the desired return and, last but not least, your risk appetite.
Compound interest was already admired by Albert Einstein, who mentions it in one of his quotes:
“Compound interest is the eighth wonder of the world. Those who understand it, make money off it, those who don’t, pay it.”
INVESTUncertain versus fixed return
Due to the volatility of shares, precious metals and cryptocurrencies, you never know exactly how much your investments will yield in the end. With fixed-rate assets, on the other hand, you will know the amount of return in advance. The increasingly popular P2P and P2B investments are examples of fixed-rate instruments.
TIP: Read about the future of P2P investing.
You can invest in loans easily using the Czech online platform Bondster. It operates a marketplace where there are already 34 reliable financial companies from 23 countries of the world, including three from the Czech Republic, that offer investment in various types of loans.
The compound interest effect
A big advantage of investing in loans on Bondster, compared to other assets, is that you receive part of the principal and interest earned to your investor account in regular monthly instalments. If you immediately invest this money in other loans (i.e. reinvest them), you will earn interest on the interest you have received. This way, you will earn interest on the interest earned, which will further increase the total return on your investments.
You can reinvest the principal and interest either manually or automatically using a pre-set or custom investment strategy. The second option is indisputably more convenient and faster.
The power of compound interest becomes apparent with a long investment horizon
The effect of compound interest is strongest when you invest regularly over a long period of time. If you put aside, say, 100 EURO per month and invest it in loans with a fixed annual return of 12 per cent, in 20 years, you will have almost 106 000 EURO. Although the sum of all your deposits over this time will “only” be 24 000 EURO, you will earn more than 83 000 EURO in interest. If you keep investing regularly for 30 years, you will invest a total of 36 000 EURO, but the overall amount of money saved will exceed 394 000 EURO.
Author of the article: Roman Muller
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