Harness the Power of Compounding - Get Rich--Slow & Easy

Probably the most important thing you need to know about building wealth is the power of making regular periodic investments and reinvesting rather than spending the profits. The results you would get following this discipline are surprising. Say you start with nothing, but decide to put $500 of your income into an investment account every month, and you commit to letting your money ride. That means you cannot withdraw any funds until you have reached your long-term goal. The overall market, at least as measured by the S&P 500 index, returned 11.8%, on average, annually over the past 10 years. If you achieve that same return, you would have $114,000 after 10 years. But it gets better. You’ll have $486,000 if you stick with the plan for 20 years and a cool $1.7 million in 30 years. The process I’m describing is a combination of two powerful investing strategies: compounding and dollar-cost averaging.

Compounding is simply reinvesting rather than spending your profits where by doing that you will capture the future returns on your reinvested profits as well as on your original investments.

Dollar-cost averaging means that the fixed monthly investment buys more shares of a mutual fund or stock when prices are low, and fewer shares when prices are high. For instance, if you were investing $500, you would get 10 shares if a stock were trading at $50, but roughly 12 shares if it dropped to $42.

Discipline Required - The hardest part of implementing these strategies is making the regular monthly investments. It’s easy to procrastinate adding to your account if the market is down or if you could use the cash for something else. The best way to make sure that the regular investments happen is to set up an account with a broker or mutual fund that automatically deducts a fixed amount from your bank account every month. While you could do it with stocks, the easiest way to implement the strategy is with a portfolio of well-chosen mutual funds that are likely to produce returns at least ‘even’ with the market, and if you’re lucky, ‘beat’ the market. A little goes a long way in that department. For example, starting from zero, if you managed a 14 percent average annual return instead of 11.8 percent, you’d have $2.8 million after 30 years instead of the $1.7 million I mentioned earlier. Once you’ve selected your fund portfolio, buy equal dollar amounts of each fund. Then add to each fund equally every month. Periodically you’ll have to replace some funds that have gone bad, but be sure to avoid the temptation to take money out of your portfolio in the process.