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The power of compound interest in financial markets



What is investing?

It is a common belief or narrative that saving is a way of investing for the future, which is not entirely true. Although saving is the starting point towards accumulating disposable income to explore various investment options with, it in itself is not investing. When you consider the time value of money, you will soon realise that saving is not as beneficial or lucrative for your future as you initially might have thought. Merely storing money away and not using it in any interest-yielding facility means that it will essentially be of even less value in the future because of factors such as inflation and the increasingly high cost of living.

This is why industry insiders and financial advisers often champion investing because it means that your funds will “grow” and be of the same value, hopefully more, at a future date upon which you decide to use it. While investing locally is applaudable, some may argue that you should explore international markets and try to invest in foreign currency trading, for example, to truly capitalise on the strength of another currency as opposed to your local one, which may be dwindling or performing worse than it has been in recent years.

Understanding compound interest

You may be questioning how and why a certain amount of money may be worth more in the future, which where the concept of compound interest comes in. Compound interest is when interest accumulates and is added to the principal amount that you invested and the interest rate then applies to the larger principal amount and leads to exponential growth of the amount. The interest yielded can then be offset against inflation and other economic crises and be more beneficial than merely saving money with no prospects of it growing over a certain period of time.

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Investing early

That being said, this is why it is advised to start investing early. The earlier you start investing, the more compound interest you stand to accumulate. Moreover, a generalisation is that when you are younger, you have very little responsibilities and can afford to take on higher levels of risks and explore various investment options. Given that investing does carry a certain level of risk, the returns can also be quite significant.

When you consider forex and stock trading, for example, some believe that you get better with time and that practice makes perfect, therefore, the earlier you start practicing, the more successful you are expected to be later on in life. Going through hurdles, experiencing losses, becoming accustomed to market conditions and turbulences, as well as the ability to bounce back from potentially major financial setbacks are just some of the things that time buys you.

With the convenience of technology and the internet, many believe that there has never been a better time than now to start investing. In addition to the workshops that are being hosted on trading and the resources that brokers offer, potential investors are spoilt for choice in terms of expanding their knowledge and upskilling themselves on the investment options that exist, market conditions, and even success stories that can be used as guidance on the steps to take towards attaining financial freedom, whatever it may look like to you.

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