When you own an income-producing asset, you’re immediately in a position to harness the power of compound interest.
Too often, investors get caught up in the ups and downs of the market rather than the flow of cash into their pockets. The basic premise behind selling at higher prices means you need to get rid of your asset, your golden goose, to make money. I don’t like that game for you.
For you, I want steady income. Take care of the income, mix in some time, and the price will follow.
I like this wonderful piece written at Vanguard that lays it all out.
The more time you have, the more you benefit from compounding
Not only can the passage of time help lower your investment risk, it can potentially increase the rewards of investing.
Imagine you place 1 checker on the corner of a checker board. Then you place 2 checkers on the next square and continue doubling the number of checkers on each following square.
If you’ve heard this brainteaser before, you know that by the time you get to the last square on the board—the 64th—your board will hold a total of 18,446,744,073,709,551,615 checkers.
No, we’re not promising to double your money every year! But this principle—known as “compounding”—is important to understand: When your starting amount is higher, your increases are higher too. And over time, it can seriously add up.
As a rule of thumb, if your investments returned 6% annually, you would double your investment about every 12 years.
For example, if you earn 6% on a $10,000 investment, you’ll make $600 in the first year. But then you start the second year with $10,600—during which your 6% returns net you $636.
In the 20th year of this hypothetical example, you’ll earn more than $1,800—and your balance will have increased more than 200%.
