Turning a little Money into a Lot

Regardless of age, the desire for financial independence remains an important goal for many people. To accomplish this goal, you cannot ignore the value of investing for the future. It has been proven time and time again that putting your money to work for you is the best means of gaining wealth. Still, many people shy away from investing, fearing that they do not earn enough to warrant evening trying. Don’t let your income scare you from what can be a great turning point for your financial future.

When most people think of investing, wealthy individuals purchasing stocks and bonds in enormous quantities usually comes to mind. Believing this falsehood keeps many people from understanding what their money can actually do for them. As with saving, people can start investing in small increments. Over time, the amount you set aside in your investments will begin to add up.

The major benefit of investment lies in the compounding effect. Interest is earned on the money used in the investment. Eventually, the interest earned on the initial investment will earn interest itself. This concept of interest earning interest is the compounding effect. It allows your funds to grow even faster in addition to your regular contributions.

For example, let’s say you contribute $1,000 to an investment account. This account earns 5% interest annually. After the first year, your account increases by $50 ($1,000 x 5%) to $1,050. If you make no further contributions to the account, at the end of the second year the balance will increase by $52.50 ($1,050 x 5%), totaling $1,102.50. Without make any more contributions, your initial contribution and the interest it earned will continue to earn interest exponentially with each passing year.

Although $1,000 is used in the example, this effect will occur no matter what amount you regularly invest. If you can set aside $5, $10, or $20 a month, you can take advantage of the compounding effect. The key is to set aside money so that it can work for you. You may have to cut some spending here and there in order to make it work. To do this, you may want to create a budget in order to regulate your spending. Just remember to have a specified allotment for investment contributions. Incorporate investing into your life and you will be well on your way to financial independence.