Planting Money Seeds – Part 2

The power of compounding

Time is an important investment concept, thanks to the power of compounding. Compounding allows your investments to grow exponentially over time. The earlier you plant your money seed, the more time you have to enjoy the benefits of compounding. This is best illustrated with an example.

Example 1

Imagine that you invested $10,000 as an initial money seed and that it earned you a 5% annual return that you reinvested each year.

  • After 10 years, your investment would be worth $16,470 (a return of $6,470 in this first ten-year period).
  • After 20 years, your investment would be worth $27,126 (a return of $10,656 in this second ten-year period).
  • After 30 years, your investment would be worth $44,677 (a return of $15,551 in this third ten-year period).

Notice how the return in each ten-year period is increasing over time. This is the power of compounding. That power can be magnified further by investing a higher initial amount initially or by continuing to invest additional incremental amounts over time.

Example 2

Let’s see what would happen if you invested $20,000 a month into the money tree we described in Example 1.

  • After 10 years, your investment would be worth $32,940 (a return of $12,940 in this first ten-year period).
  • After 20 years, your investment would be worth $54,253 (a return of $21,313 in this second ten-year period).
  • After 30 years, your investment would be worth $89,355 (a return of $35,102 in this third ten-year period).

Example 3

Now let’s see what would happen if you invested an additional $50 a month into the money tree we described in Example 1.

  • After 10 years, your investment would be worth $24,234 (a return of $14,234 in this first ten-year period).
  • After 20 years, your investment would be worth $47,678 (a return of $23,444 in this second ten-year period).
  • After 30 years, your investment would be worth $86,290 (a return of $38,612 in this third ten-year period).

In addition to letting you leverage the power of compounding, planting your money seeds as early as possible also allows you to recover from any market downturns that may temporarily affect the value of your investments.

The importance of diversifying your investments

There’s another old saying that ‘you shouldn’t put all your eggs in one basket’. It especially applies to investing.

If you put all your investments into one sector (for example, cash, shares or property), you’re more exposed to a market downturn in that sector.  Investments like shares and property can potentially fall in value, not just rise. You need to protect yourself as much as you can from that risk.

Diversifying your investments allows you to spread your risk. It’s rare that all investment markets will perform poorly at the same time. For example, if there is a downturn in the share market, investors will typically move funds into the property market and vice versa.

So it’s important to plant your money seeds in different sectors to ensure your long-term financial well-being.

How we can help

At Qi Wealth, our team of financial advisors can help you to plant your money seeds so you can take control of your financial future. We’ll take the time to understand your needs and goals so we can provide you with the best possible advice.

We’re constantly analysing investment markets, cycles and trends.  Our team can advise you on a wide range of investments and risk management techniques. We can also help you to manage your investment portfolio as it grows over time. We develop long-term, trusted relationships with our clients.

Contact us today to find out how we can help you!