Let your investments grow
Published in Have a Go News, January 2010
by Dale Gillham
In a previous edition of Have a Go News we investigated the three laws to wealth creation - spend less than you earn, invest your surplus wisely the third rule to wealth creation, which I will discuss at greater length in this article - leave your investments alone to grow.
Einstein referred to this as the power of compounding or the eighth wonder of the world. When you invest wisely your money will normally earn interest, dividends or capital gains.
When you reinvest these earnings, it provides additional earnings because of the compounding effect. Consequently, it is this rule that is the real key to wealth creation - once you embark on your investment journey you should leave your capital alone to allow it to grow.
Sadly, however, many prefer short term gratification and dip into their investments to buy a car or go on a holiday or something unrelated to building wealth.
If you do this you need to be aware that this will potentially put you years behind achieving gains over the first few years simply because the real effect of compounding is only seen when your money is left for longer periods as it begins to grow much faster.
A rule of thumb that I apply to all my investments is that if your return comes from investing then it should go back into your investments. For example, if your tax return increases as a result of deductions from your investments, the increase in the return owed to you should be invested to fund other investments.
Similarly, if you receive a capital gain from selling an investment, this should be reinvested into a new investment opportunity. Only when your investments are generating income and growth that is equal to or better than what you earn from working should you consider using your investments for income for lifestyle purposes.
Now that you have a better understanding of the laws of wealth creation, will you be one of those people that walks away saying `yeah, yeah I already know all this'. If this is the case, I can only assume that you are already financially independent.
If you are not then my challenge to you is to make a concerted effort to truly understand these laws and set yourself a goal to apply your understanding to your investments. Financial independence, like any other goal or desire requires a plan or strategy. I have given you the necessary steps; the next move is up to you.