Secret 3 : Make Your Savings Multiply.
Money that flows to you as a result of an investment is also called your return on investment (ROI).
The third secret is to always reinvest the returns on your investments. As you will soon see, it is the power of compound interest that will accelerate your personal wealth. When you invest there are two investment terms that you need to be familiar with. The first is simple interest. Simple interest is the interest (or return) that your cash investment generates. It can be calculated by first multiplying your investment by the annual interest rate. This gives you the amount of interest that you will receive each year. If your investment is for less than a year you then need to multiply your annual interest by the number of days of the investment period divided by 365. Let's take an example:
Using compound interest, your initial investment and some or all of your return is reinvested. This way your initial interest earns more interest. And once that investment matures and you reinvest, your initial deposit grows. Using compound interest to your best advantage Compound interest is most effective where you have multiple compounding periods in one twelve month period. Let's take an example. You have $1,000 to invest and a choice of two mutually exclusive investments, which are outlined below:
Which one would you choose? Option 1 returns to you $100 ? so that at the end of the year you would have $1,100. Option 2, even though it has a lower interest rate, returns to you $102.52, $2.52 more. The reason for this is that with option 2 your interest after the first month is calculated and added to your initial investment for the second month. In the third month, your interest is calculated on your initial investment, plus the first two months interest. In other words, you get interest on your interest. This is compounding. You may be thinking "$2.52, who cares?". Let's look at what happens over 10 years. Making no further capital advances, the value of each investment is
Taking Option B, by simply reinvesting your returns your investment would be 59.4% per cent higher than Option A. A note here is that although the interest rate on Option C was 9.8%, it had an effective interest rate of 10.52%  because of the effect of monthly compounding. When looking at various investments be sure to note the differences between nominal and effective rates of return. Charge card providers know about the power of compound interest. If you read the terms and conditions of your credit card it is likely that they will advertise the nominal rate. However, if the interest on your card is charged monthly and your minimum repayment is less than the interest charged, you will find that the compounding effect is pushing you further into debt. What rate of interest is does your savings account attract? How often is interest paid? Compare this with your charge card. Do you benefit or bleed from the effect of compounding? Always reinvest your returns and avoid spending your investment at all costs. Action Steps For Immediate Results
