The stock market can be daunting, especially if you’re not an expert investor. But it’s also a wealth-building engine, and the right strategy can help you rack up hundreds of thousands of dollars (or more) over time.
It is also not as difficult as it may seem to make money on the stock market. In fact, the secret to building wealth requires virtually no effort on your part and is to harness the power of compounding.
What is Compound Income?
Compound interest is basically when you earn interest on your interest. The more your account balance increases, the more interest you will earn. Over time, this creates a snowball effect that allows your money to grow exponentially.
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The same concept applies to investing, and compound income can increase your savings with very little effort. All you have to do is invest as much as you can afford and then leave your money alone for as long as possible. The more time you give your savings to grow, the more you will accumulate.
For example, let’s say you invest $1,000 in a S&P500 index fund with an average rate of return of around 10% per year. Assuming you don’t touch that money and don’t make additional contributions, that $1,000 could grow to almost $7,000 after 20 years.
To earn much more, you can continue to invest a small amount each month. Let’s say, for example, that you invest your initial $1,000, but also invest $200 per month. Assuming you were still earning an average return of 10%, you would have about $144,000 after 20 years.
|Number of years||Total savings by investing $200 per month, earning an average annual return of 10%|
Time is your most valuable resource when it comes to compound income. By simply investing consistently for as many years as possible, the sky is the limit in terms of how much you could earn.
How to handle market declines
The most important thing to remember when investing in the stock market is that it’s very different from a savings account. Even the safest investments experience regular ups and downs, and there will be times when your portfolio will lose value. It’s normal.
Despite this volatility, it is better keep investing anyway — even when the market is in crisis. While your wallet might lose assess during market declines, you don’t lose money unless you sell your investments.
Regardless of how the market moves, maintaining a long-term perspective can reduce your risk. The stock market as a whole has recovered from all the crashes, bear markets and recessions it has faced, and it is extremely likely that it will also recover from future downturns.
By simply waiting and continuing to invest as usual, you can keep your savings on track and avoid losing money.
The easiest way to generate wealth
The stock market can be intimidating at times, especially during periods of volatility. However, investing is still one of the easiest and most effective ways to build long-term wealth, and compound income can increase your savings.
By investing regularly and keeping your money in the market for as long as possible, you can rack up hundreds of thousands of dollars with just a finger lift.
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