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Compounding

Updated Dec 10, 2020
Article Rated: 7.01
3.5 star rating (99 votes)
You may have come across this world if you have ever been interested in investing. Compounding is one of the main processes in the investment path, which helps to multiply your benefit from the money you invest.

Compounding can be simply described as interest on interest. Thus, the addition of interest to the main principal sum. In the investing world, compounding refers to generating earnings from previous ones. Current investment generates a certain amount of profit, which is later reinvested to another - or same - program to generate more income. Compounding rates can be changed individually by an investor, and that results in the amount of the final income. Here is the more detailed explanation.

How It Works

Letís imagine that you have put your money in an investment program that offers 40% of interest per month. The sum you put in is $1,000.

After the first month, your investment grows by 40% and is now worth $1,400. The shares have risen and your total capital has too.

The next month, your investment raises by another 40% and sums now to $1,960. The same goes for the upcoming month - it will be $2,744. Every month, the sum that is added to your capital will be calculated not from your first investment - which is $1,000 - but from what is on your investing account at the end of the month.

Therefore, the rate of growth increases progressively. For the first month, it is only $400, but it evaluates to $784 by the third already! That happens because you did not withdraw any money from your account, and the compounding did its work.

Logically, the numbers start to get quite big after the significant amount of time passes. In fact, you can get $25k+ of money after a year without adding any more money to the investment. Although you canít withdraw either, or your earnings will calculate slower.

As it is perfectly shown, compounding does an extremely great job in multiplying your income in a real investment programs. But you have to be attentive when it comes to ďinterest on interestĒ in the High Yield Investment Programs.

The main reason for compounding success in basic circumstances is the predictability of an investment's lifespan. You canít do the same thing with HYIPs - nobody can forecast how long this program will live. Therefore, you have to think about safety along with calculating the compounding benefits.

One of the ways to keep both your starting money, and good monthly earnings is to use different compounding strategies.

Compounding Strategies

Letís get back to the calculations. Again, imagine that you have made an investment to a HYIP which pays 40% of interest monthly. Looking back to the previous accounts, with the compounding rate that equals 100%, after a year our investment brings you more than $25,000. But, now you have to consider that the HYIP you have invested in can shut down after half of the year of working perfectly normal. You can just wake up one day and see that all of your earnings, as well as your starting money, have vanished. Thatís why it is crucial to use a different technique of dealing with the interests.

The main recommendation you should absolutely follow is getting your original investment back as soon as possible. You need to have at least the balance in your finances, and you canít afford losing all of your investments. Therefore, after the first months you need to set your compounding option to 0%. That means you have to withdraw all of the earnings that you get on your starting capital.

In the example above, you will get your original investment back after 3 months - and even will have extra $200 that you can already leave to start the growth process.

After you have got your money back, you can divide the earnings 50/50. A half is left in your investment program, and the half is safe at your own bank account. This way you will inevitably earn more than by withdrawing all of the interest every month, and protect yourself at the same time. If everything goes smoothly, and HYIP will still be running after a year, you still will get a sufficient income.

Of course, the 50/50 rule is not mandatory. It is just the most common option among the experienced investors. If you are confident enough in a particular investment program, or you tend to risk, you can work with the 70/30 compounding rate. But do always remember to get your initial payback as soon as possible. Risk is good only when that risk is safe.

The same applies for the red flags and possible warnings that you may see as you work with a HYIP. You have to be careful at witnessing the signs that should warn you. If you ever notice even the slightest red flag, it is way safer to immediately set your compounding to 0% and withdraw all of your earned money before the whole program collapses.
Being attentive in the investment field is always better than blindly hoping for the best.



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