“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein.
This is one of my favourite quotes of all time. Gaining Financial Independence requires a source of passive income to cover your basic expenses. Passive income can be achieved through a variety of activities such as starting a business, real estate or stock market investing. Here are some useful tips.
The calculations below illustrates how a diversified portfolio could grow over time by saving £600 monthly over a period of 20 years. A typical historical annual return rate of 7.5% is assumed for such a portfolio. I was astonished the first time I ran this calculation – by Year 9 the annual interest would be nearly equal to the cash invested in a single year.
If you look at the last column closely, you will notice that within 15 years or so it is possible to have enough saved to achieve Financial Independence. The time taken to reach your goals will depend on your savings rate and size of your expenses.
|Year||Year Deposits||Year Interest||Total Deposits||Total Interest||Balance|
Pay yourself first
Paying yourself first means saving a percentage of your income as soon as you get paid. Once done, you can figure out how to manage your remaining funds until the next pay check. From personal experience I realised that before I saved using this method I could not account for where my money disappeared to.
Saving is more important than return rates
Even though good return rates are crucial, it is even more important to have a high savings rate. Saving more will ensure that it will be easier to ride stock market fluctuations and overcome any individual mistakes which investors make. There is little point taking big risks while saving little.
Take advantage of market downturns
People tend to panic when markets are going down. This should be viewed as a good buying opportunity as more units can be bought at a lower price. Magnified future returns will result once the markets bounce back, rolling the snowball further.
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