A small amount of money can turn into a large sum over time thanks to the force of compounding. Benjamin Franklin described it best when he said, “Money makes money. And the money that money makes, makes money”. Besides that, compounding is also sometimes referred to as “magic” or “an investor’s best friend” within the financial community. 

Compounding investments’ exponential growth happens because the investment generates returns from both its initial principal and the cumulative earnings from previous periods. By fully  comprehending compounding as a beginner, you will be able to experience the true potential of investing and set goals for how that money can increase over time.

Get familiar with the Concept of Compound Interest

The wonder of compounding has the power to turn your initial investment into a consistent revenue generator.  It requires three components to succeed: the initial capital being invested, the reinvestment of returns, and most importantly – time. The longer you maintain your investments, the more powerful the earning ability of the initial investment. As the name suggests, compounding interest is a snowball effect that continues to grow at a faster pace over time.

Regardless of your financial goals, the sheer intensity of compounding should inspire a feeling of urgency in your investing plan. Starting your investments early can make a huge difference in your net worth due to the power of compound interest. For instance, if you delay investing for just nine years, and your average investments generate an  8% annual rate of return, your investments may only have half the value as it would have if you started investing now. Therefore, it’s important to start investing as early as possible to take advantage of the potential for long-term growth.. 

Let’s use an example to illustrate 

Suppose you invest RM15,000 at an annual interest rate of 8%. After one year, your investment will be worth RM16,200, giving you RM1,200 as your profit. If the profits are then reinvested for another year and continue to earn 8% p.a. (RM1,200 x 0.08 = RM96), your investment will grow up to RM17,496(RM15,000 + RM1,200 + RM96 + RM1,200 ) at the end of the second year.

The RM1,200 return that you have invested to work with the capital will earn you an extra RM96(RM1,200 x 0.08 = RM96) next year. This additional interest earned on interest is seen as the effects of compounding interest. While this amount may seem very small right now, over the years this sum could be larger than the initial principal amount itself. In fact, in this example, your total portfolio would be worth RM32,384, with the proportion of interest returns being larger than the initial RM15,000 investment within 10 years. However, it is important to note that this assumes a constant rate of return without any losses.  

Utilising Compound Interest to Maximise Your Financial Growth

One important factor to consider is the compounding rate of your account. This refers to how often the interest on your account is calculated and added to your balance. The more frequently interest is compounded, the more quickly your money will grow.

Time is also a crucial factor when it comes to compound interest. The longer you leave your money to grow, the more it will benefit from compounding. This is why it’s so important to start putting aside funds for investments, especially for longer-term goals such as retirement as early as possible. By giving your money more time to grow, you’ll be able to make the most out of your money in the long run. Compound interest can help your investment savings grow in size, but it requires discipline, patience, and a long-term perspective.

However, it is important to note that when it comes to debt, compound interest can work against you. The longer you take to pay off your debt, the more interest you’ll accumulate over time. This means you’ll end up paying even more in the long run. To minimise the impact of compound interest on your debt, it’s important to pay it off as quickly as possible. Whether you’re dealing with credit card debt, loans, or other forms of debt, making extra payments or paying more than the minimum amount can help you pay off your debt faster and save money on interest payments in the long run.

Start Compounding your Investments with CapBay P2P’s Auto Invest

In general, automated investment systems enable investors to automatically distribute their funds across multiple investments without requiring them to manually pick and choose them. There are usually parameters that are selected up front, which will then govern what the appropriate investments are before executing them accordingly.

CapBay’s Auto Invest allows our investor to select a profile based on their risk tolerance. Based on this, our Auto Invest will then automatically allocate the investor’s funds into a highly diversified portfolio of P2P investment notes with average net returns of 8-10% p.a.. Besides that, the system also automatically re-invests any repaid funds while active, allowing for a seamless investing experience. This means that investors are able to sit back and relax, while CapBay P2P’s Auto Invest allows for maximum diversification and compounding interest as proceeds are continually re-invested.

Begin your investing journey with CapBay today!

*This article is not meant to recommend CapBay P2P products or be used as a tool to make any investment or financial decisions. Product recommendations must be independently evaluated before you invest. Any product recommendation by CapBay must not be regarded as financial planning or financial advice.

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