How can investors receive compounding returns? Compounding interest is often referred to as the 8th wonder of the world. Why?
It’s like the cartoon snowball rolling down a hill. As it falls, it doubles in size every few seconds 🤩
The reality is that its weight is increasing at an accelerating rate. What starts off as a tiny amount of snow can end in an avalanche.
It is the same with your assets (investments). Trying to build them up at the beginning stages is slow and difficult. But once it gets going, it becomes a huge magnet that easily attracts more wealth.
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Opportunities with compounding returns
P2P lending (also known as Crowdlending)
Most P2P lending platforms have an auto-invest feature. There are usually plenty of settings to calibrate, such as minimum interest rate and indicators of risk profile. Once you have it running (or multiple ones all running), the P2P platform will invest in loans for you automatically every day.
This may be the most reliable option in terms of getting steady and high returns with minimal research necessary.
Example of steady return I got from a platform:
Not only can this diversify, but it also means profits will be reinvested. Given that many P2P platforms offer over 10%, compounding returns can be huge after years of lending money.
P2P lending platforms with auto-invest:
Mintos is the largest platform in the European market. They also have the most loan originators and investment opportunities. It is clearly commendable. I have written a Mintos review you can read (including my auto investment settings) and in addition, you can actually enjoy their 1% cashback code.
If you’re a landlord instead – or even an “Airbnb landlord” – then you can apply the same logic.
The income returned from rent can be reinvested immediately. This can be used by renovating, buying more property, building extensions for more guests and so on. This is so you can increase your rent price, have more guests and own more assets. It sounds obvious, but the accelerating effect is what is usually forgotten here.
If you own a home with a spare room. The sooner you rent out that room the better. The sooner you build that extension the better. Furthermore, the sooner you apply for another buy-to-let mortgage the better. This allows for more rent money and more growth… for a longer amount of time 🙂
This is easier said than done. The question “How can investors receive compound returns” is about getting started in the opportunities where it can be done.
If you have not started real estate investing, you may also want to consider real estate crowdfunding.
You can click on the link above and read my article about this great real estate opportunity.
Shares and index funds
If you own some shares or index funds then compounding can also be utilized to reach the accelerating effect.
When you receive your dividend money, treat it as interest payments. After all, this is what compounding is (earning interest on your interest).
So instead of treating your yearly dividend payments as income, use them to purchase more shares in that stock.
Assuming it pays a dividend and the share price is steadily growing, you will be able to benefit greatly from compounding returns. You may find your equity value doubling much sooner than it otherwise would have 🙂
This can be done manually, but there are also brokers who can auto-invest for you to minimize the time wasted.
I hope you liked these investment examples to receive compound returns, and hopefully, you are inspired to get started.
The beauty of compound interest is that you can’t mess it up.
How do you calculate time in compound interest?
The 72 rule – Piece of magic
The 72 rule is a quick and accurate way of showing you how long it’ll take to double your money.
All you have to do is divide the interest rate by 72 and you have the number of years until your pot doubles.
So if you can get 9% interest, it will take 8 years (9/72 = 8). If you can only get 6%, it will take 12 years (6/72 = 12). You can follow the same rule by changing the 72, i.e divide by 144 to get growth by a factor of 4.
This means that with only $250,000 you can become a millionaire in only 16 years with a compounded 9% interest return.
It’s a natural force that utilizes time. Even those who know nothing about investing can become very wealthy from it. Of course, being good at investing enhances it, but it isn’t actually part of the compound natural wonder.
The strength of compounding is greater than the strength of being an active investor.
Patience and compounding interest will likely allow the average person to retire earlier. This question: “How can investors receive compounding returns?” can really become valuable to understand in that perspective…
How did investors use the compounding effect?
Saving around 10% of your income is actually enough to have a prosperous and healthy retirement. But what about early retirement? 😎
Compounded savings mixed with some investment should be rewarding you with financial independence from an earlier age than most. For sure it may depend on how early you start, but even just 20 years of compounding can have impressive results.
Jeremy Jacobson (Retired at 38 years old)
When Jeremy was in his mid-20s, on a good income as a software engineer, decided to save 50%-70% of his income. His wife did the same, and they managed this by minimizing their expenses. In other words to save money and invest.
Let’s assume they invested $60k every year. With the 72 rule, at 7% returns, they would have doubled that first year’s $60k over the 10 years to make $120k.
With $60k per year being contributed to this pot each year, we can soon see how they managed to retire after 10 years.
Jeremy adhered to the 4% rule, which refers to being able to build a certain amount of wealth where 4% of it per year is a liveable income. This is the ultimate self-sustainable lifestyle.
Leisure Freak Tommy – (The ‘ordinary’ early retirement at age 51)
Tommy never had a 6 figure salary. Starting from a call center job, he managed to make his way up to an engineer. But in-debted to college and lifestyle credit card, married with a house and 3 kids at the age of 20 was certainly not an easy start for retirement.
At the age of 27, Tommy began saving for his retirement with a 401K, but it wasn’t until age 40 he set in place an early retirement plan with a financial advisor. He focused on a few main principles of FIRE.
Firstly, he focused on getting rid of any debt and maxing out his 401K and ROTH IRA. These were the main saving components and were essentially enough for him to retire early with no fancy investments.
Frugal living was, of course, a large factor, but the main take-away from the story is, how he suggests, it’s totally ordinary. No incredible salary or stocks that doubled his fortune.
Just simple, old fashioned compounded savings along with a frugal and debt-free lifestyle.
I hope you liked this article about “How can investors receive compounding returns?”.
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