If there is one thing you can do today, right now, to improve your financial position, it is to understand compounding. And then find ways to take advantage of compounding.
Because compounding can make you rich.
The single most important concept in finance and investing is compounding. And if you understand it, your financial knowledge will be miles ahead of your peers and you will be on the fast track to Financial Freedom.
Compounding is why the rich get richer. And it is why you will become financially free because compounding does this to your money:
And if your financial advisor is any good, he or she will tell you:
If you’re in debt, before you do anything get out of it because debt is dirty, awful, smelly, stinky, rotten and will bury you alive and never let you see the light of financial freedom.
And then when you’re out of debt, go make your money compound because compounding is how you build wealth. And because compounding is the Golden Ticket to Financial Freedom.
You don’t hear much about compounding in your mainstream financial newspapers because mainstream financial newspapers are generally more useless than geese poop.
But just because you don’t hear about compounding in the personal finance sections of the New York Times or Wall Street Journal doesn’t mean it’s not useful to financial independence. It’s insanely useful.
The two most useful tools to help you reach financial independence are:
- Your habit of continual learning and acquiring new skills
- And compounding
Because investing in yourself is the best investment.
And because compounding is the sweet elixir of profits.
For example, how do you think banks make money? They make most of their money from your debt. Your compounded debt. Banks are only rich and powerful due to compounding!
Banks make money from the interest you pay on credit cards, mortgages, student loans, among other debt products. And remember, this is often interest that compounds! You’re losing buckets of money in compounded interest payments to banks. And if banks find compounding profitable, you know there’s money in compounding.
The trick is, you want to flip the equation where you’re the one benefitting from compounding, and not getting destroyed by it.
And thus if you’re serious about Financial Independence and having the freedom to do what you want to do in this world, you’ll make it your mission to understand compounding on a gut level and find where to leverage it (e.g., ultra-low-cost passive index funds) and where to avoid it (e.g., debt).
You will take the time to study compounding, learn compounding, and become one with compounding.
And you will sooner or later find yourself reading about two of the most effective ways to take advantage of compounding:
- The dividends of stock index funds
- And the interest of bond index funds (known as coupon payments)
And when put together in a thoughtful portfolio and asset allocation, you’re in great position to achieve financial freedom thanks to the power of compounding.
Because the way you win the compounding game is to keep investment costs low and seek out investments that pay you dividends and interest. This is how your money compounds.
Any time you have a situation where money grows on money, like dividends growing on dividends or interest growing on interest, you get compounding.
And any time you have a situation where money grows on money over long periods of time, you get exponential growth—which is what gives compounding its power and what will make your money mushroom into a giant nest egg.
Imagine the peach in James and the Giant Peach. It starts out as a small, normal-sized, tasty peach. And then grows wildly into a magical Giant Peach. You want your money to grow wildly into a magical Giant Peach. And it can do so with the help of sweet compounding.
If you want to learn more about compounding, here are two good videos:
Advanced: Professor Gautam Kaul of the University of Michigan explains compounding
All investing is subject to risk, including the possible loss of the money you invest.