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"If you want something you've never had, you must be willing to do something you've never done"

Compounding Interest, Capital Gains and Inflation: A guide for Beginner's

Updated: May 14

Updated: 14 May 2022


Persevering is an important quality, not just in finance, but in anything you do. We all know that sticking things out can make things better and sometimes, things actually improve. Quitting doesn't solve anything. Sticking out the hard times to see the rewards, it is no different in finance too. Here's why:

  1. Investing your money for the long term is more likely to see positive results because your money has been averaged out through the highs and lows of the market. This is called 'Dollar Cost Averaging'.

  2. Money appreciates when it is invested and so the longer it is left to grow, the larger it will become. This is called 'Compounding Interest'. Compounding Interest is the interest earned on the interest earned. It's an interesting whakaaro and one which should be studied.


So, what are some examples of money working better and providing higher returns over time?I always love to use Money Hubs Compounding interest Calculator which can show you just how influential time is...A link to the calculator can be found here:

What this calculator shows is that over time, money earns interest. Compounding interest is the interest that is earn upon the initial interest. So, in short - your money will compound at a rate much higher than if it was not earning interest. Another advantage to investing long term as opposed to short term is this:


  • Investing long term enables you to ride out the lows. If you were investing daily, you may have to sell at a loss in order to recoup your initial investment. With long term investing though, you get to ride out the lows. Like I said, this is called 'Dollar Cost Averaging'.

Dollar cost averaging is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals.


Houses:


Houses are awesome investments for many reasons, like:

  • It's like killing 2 birds with one stone because you can use this investment to live in.

  • You don't have to rent.

  • House prices appreciate meaning that the property you brought for 200k in 10 years could be work 400k, even though you are still paying your 200k mortgage


In Te Ao Maori, Houses are also taonga. They are a spiritual asset that is something we can call home in order to provide for our own tamariki and kaumatua. Some people refer to this as matemateaone.


Investing long term is an awesome way to ride out the lows and make wins financially! Through Dollar Cost Averaging, and Compounding Interest I believe that no matter how much money you have, you will be able to increase your portfolio's value. I plan on doing this myself, and have been doing so for a while now. How? I invest regular amounts in to the stock market... I invest 20% of my income in to managed fund, each and every pay. So, no matter how the stock market is performing, I don't need to sweat it. Eventually, the market will increase in value and so too will my portfolio. This is called a capital gain. Capital Gains are when something you own increases in value, like a house increasing in value. The other way I intend on building my portfolio is through compounding interest - the interest which is earned upon interest.


So, why would I invest instead of just saving money in an account? Well this is where something called inflation comes in to play. Inflation is the increasing cost of living. Over time, the products which are needed to live, increase in price. For example: rent for your house may have costed $300 5 years ago, and now it costs $500. This is inflation. Inflation makes savings less effective because over time, your money becomes worth less. This means that $100 last year could buy more than $100 could this year. Inflation at the moment has been seen to be hitting gas prices and kai from the grocery store the hardest. This is why I choose to invest as opposed to keeping my money in a savings account.


If you have content requests, or would like to ask me a question then please email me at tekahukura@maorimillionaire.com




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