The Number 1 Financial Regret You Want to Avoid At All Costs

Last Updated May 15th 2019
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The concept of compound interest was described as "the greatest mathematical discovery of all time" by none other than Albert Einstein. But you don't need to be a mathematical genius to understand it; in fact, the concept is fairly simple.

When you invest money, you earn a rate of interest on your capital. A year later, you earn interest on your original capital plus the interest from the first year. This cumulative effect keeps building up year upon year, and this is the miracle of compounding. If you don't take advantage of this fantastic phenomenon from the earliest possible opportunity, it will be at the top of your financial regrets further down the line.

See also: The 7 Dumbest Mistakes You Can Make When Investing

The most important rules of successful compounding

If you haven't already, then start investing now! The earlier you begin, the more likely you are to gain from your investments with relatively little input. Time is an important factor because interest increases with it.

In fact, over time consistently investing relatively small amounts can yield astonishing results. For example, if you invest £100 a month for 40 years, with a compound of 12% per year, then at the end you will have a mindblowing £980,000!

While this sum is staggering, you shouldn’t come into an investment with the mentality that it’s easy money. Play the long game and put in the effort. That’s how fortunes are made, not with blind optimism and hopes that things will all turn out fine in the end. Instead, get an education on all things finance and rule the world of your personal wealth.

 

The power of compounding

Money and how the world works

The world economy is set up in such a way as to encourage investment and the flow of money. After all, what good is wealth if it merely stands in one place? That system rewards proactivity and investment instead of saving up and hoarding money. We now have to generate wealth, not just save it.

If that wasn’t the case, the world’s finances would be quite stagnant. People wouldn’t spend their money and that money couldn’t be invested into new endeavours.

But that’s not to say that everyone should just start spending their entire income, merely that multiplying your money is a better idea than keeping it static. When you think about the effects of inflation, it becomes apparent that staying at the same spot is actually going backwards.

Imagine it like walking against an escalator. If you stop climbing, the steps move downwards, dragging you with them. You don’t want this to happen with your finances. In that metaphor, the steps are the economy. It always moves in such a way as to inflate the value of your money or drive up your demands.

Think of rent, the prices of gas, or even how much you had to spend for lunch just 10 years ago. Chances are that the amount of money you spent was less than what you have to spend now. On the flipside, your salary probably increased, with employers and the government bragging that they have “increased your salary” while not mentioning the fact the value of that money is more or less the same it was.

In fact, many people constantly have a larger number of on their salary but end up not moving forward in life. That’s because these people do not understand basic facts about economy and investment.

The ground beneath us is moving

Staying at the same spot requires walking forward and thriving will require running. The main mistake people do is decide that what they do have is enough and then they stop developing. As mentioned above, this does not work because things change constantly. Staying in the same spot is going backwards.

That’s the Number 1 financial regret traders and regular people have in the end.

To get the very best out of compounding, you must be aware that seemingly small differences in return actually make a huge impact, so don't shrug off a difference of 1%. Compounding offers great returns, particularly when you start early, but understand that time and patience are fundamental to compounding.

And don't squander your inheritance all in one go; this is one of the classic financial mistakes - you need to find the right balance between enjoying yourself now and providing for yourself later. Patience is an important factor of a good investment.

You don't want to be preoccupied with your finances in your old age, and the only way to be able to relax fully after retirement is to have made the appropriate arrangements beforehand. You should focus on acquiring some quality assets from a young age as an adult, and learn how to manage your capital efficiently and not waste it on liabilities that will only depreciate over time. Compounding is most profitable the earlier you start doing it, so act now to get the most out of your investments.

Your life doesn’t end with retirement, but it also doesn’t begin there. You have to think of your future prior to it happening. If you don’t you run the risk of an unpleasant surprise once you do reach your “Golden Years”.

Forming relationships with other traders, even beginner ones, is important for your future forex trading developments. A good income starts with good knowledge, so spread it around.

Don't miss: Why Is Investing So Much Better Than Saving?

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