In this short post, we want to point out to the younger generation of Papua New Guinea the importance of investing early in life. Time is one thing teenagers have on their side. Now with the power of compounding interest, young people have greater chance of striking rich.
What is compounding interest?
Compounding is when something grows over time, and the amount by which it grows is also growing. It’s much easier to understand when you consider some examples.
(Math alert! Math alert! Keep reading, though — it’s just multiplication, and it’s very important stuff.)
Let’s start with a simple example. We’ll use 10% as our annual growth rate and start small, with K100. Let’s call this Year 0, when we start with K100. One year later, in Year 1, our K100 has grown by 10%. Since 10% of 100 equals K10, we add that to our money and end the year with K110. Got that? (Note: Remember, to find out what 10% of anything equals, just multiply the number by 0.10. To find 5%, multiply by 0.05. For 25%, by 0.25.).
Very generally, compounding here means investing your money, and then reinvesting the returns your invested money makes.
In summary, the power of compounding depends on:
- How much you invest (and how regularly)
- Your growth rate
- How long you let your money grow
You might start investing sooner or later. You might invest K300 each year in your first two years, K3, 000 per year in later years, and more as you’re able to. You might earn an average return of 10% over many decades, or perhaps your return will be 7% or 15%. You can’t control every variable, but to a great degree, you can control how much you invest, how you invest, and how long you let your money grow.
One of the most important factors here is time. It’s one thing that you, as a teenager, have much more of than any adult. It can be a huge advantage. You don’t have to start investing today, or even this year. (And in fact, you shouldn’t begin investing until you’ve got more knowledge under your belt.) But if you learn a few things now and get started soon, you can set yourself up to enjoy comfort and security for most of your life.
Remember also that you can still enjoy your life while you’re saving and investing. You can amass great wealth by regularly investing a portion of your income — not all of it.
Related articles on wealth creation
- 4 steps to grow wealth with residential property
- 6 investment vehicles to grow your wealth
- How to start a successful business
- How to use LEVERAGE to grow your wealth
- 8 proven recipes of remaining poor