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How the magic of compounding grows your money

19th June, 2016

Hamzah Shalchi | Regional Manager of Guardian Wealth Management

Hamzah ShalchiIt used to be that there were two type of millionaires – inheritors and entrepreneurs. The former, a rich elite who largely received their wealth through the family; the latter, self-made, self-reliant business-owners who had spent much of their hard working life being persistent and taking risks.

But what about everyone in between? Given that to constitute as a millionaire you need just Dhs1million net worth, the opportunities to achieve this nowadays are greater than ever. Recent findings have revealed that there are actually more like six types of millionaires – ‘Satisfied Savers’, ‘Status Chasers’, ‘Altruistic Achievers’, ‘Secret Succeeders’, ‘Disengaged Inheritors’ and ‘Deal Masters’. The most intriguing of the categories being the ‘Satisfied Saver’ – a financial savvy individual who has built wealth through hard work, by living below their means and taking moderate financial risks.

This ‘Average Joe’ has planned well for a stable financial future, saved early and taken advantage of the best financial options available to them. I would put money on compound interest playing a huge part in this.

Compound Interest was called the ‘eighth wonder of the world’ by Albert Einstein who also said, ‘those that understand it, earn it. Those that don’t, pay it’. The idea is to let your money earn interest which in turn earns interest, resulting in a nice savings pot at the end of it. The trick however is not to save more, but to save earlier.

For instance, if a 40-year-old saver was to save Dhs5000 a month for 10 years at an interest rate of 5%, he or she would have saved Dhs630,000 by the time they were 50 years-old. However, if a 30-year-old saver was to save Dhs5000 a month for seven years at 5% interest, but left the pot to mature at 6% interest until the age of 50, he/she would have earnt Dhs1,000,000. It is clear to see the magic of compound interest.

You may be thinking that a 5% interest rate is rather on the generous side but this is quite easy to achieve when considering a multi-asset investment strategy. The key is to shop around and seek the best savings options for your lifestyle and financial goals. The numbers can also be adjusted so whether it is Dhs5,000 a month or Dhs500 a month, the principle is still the same.

Rather it is the commitment and discipline to saving regularly that is the hard part and having the patience to leave it until you truly need it. This a long term savings plan, not a short term solution and once committed, you will be well on the road to millionaire standing.

Disclaimer: The content of this article/report is that of the author(s) and does not necessarily reflect the official opinion of Wealth Monitor. The opinion does not constitute investment advice and is provided for information only.

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