One of the great myths of investment is that you need an MBA, a Porsche and access to lots of cash before you can take part.
Fortunately nothing can be further from the truth and with the right long-term approach; almost anyone can become a millionaire investor.
Long-term investment strategy
In short, this article will explain a low-risk investment strategy that could allow you to retire younger, travel more, buy expensive cars, pay off your mortgage or simply enjoy a comfortable lifestyle with a greater level of financial security.
Other investment strategies might provide greater returns in the short-term, but will require a significantly higher investment and much more risk.
Understanding the importance of compound returns
When you put money into the bank, you earn interest on your savings. The next month, you will earn interest on that interest as well as the money that you originally put in.
This cycle will continue each month and as long as you do not take any money out of your account, you will be earning increasingly higher amounts of interest, on top of your original contribution.
The same principle applies to investments in shares and investment funds. By re-investing dividends into the purchase of additional shares or funds, you will be able to generate additional earnings, which you can then re-invest again and again.
Turbo boosting your compound returns
You can improve the performance of your compound returns by adding additional contributions to your savings account on a regular basis and by selecting investments that provide higher annual growth rates.
The powerful effects of compound returns are best seen over a long period of time. The table below shows the returns that can be achieved by making monthly contributions of £100 over a period of 40 years.
Note how small differences in the rate of return have a huge impact on the final figure.
Rate of return
Maximising your rate of return
In the above table we can see how a combination of regular contributions and an ability to find investments that provide a high rate of return will literally turbo boost your savings into the millions and it is important to understand how to obtain these results.
Below are four good places to start:
1 - Ditch the bank account
Most of us have a savings account, but often the interest rate on savings is less than 4%. Consider other places to invest your money, where you are more likely to get a better rate of return.
Why not invest your money in stocks and shares, where a rate of return between 8% to 12% is not unreasonable?
2 - Start saving and investing ASAP
The earlier you start, the greater the effect of the compound returns. Many people put of saving when they are younger, because they feel they cannot afford it, but try to understand the power of small amounts.
Small, regular contributions will soon begin to grow into a healthy pot of money. Even if you can only begin by saving £30 a month, this is still better than nothing and as you begin to earn more money, you will be able to increase your contributions.
3 - Buy cheap financial products
Did you realise that charges for financial services can vary enormously among different banks and investment houses, so take care when choosing investment products and make sure you compare prices.
Expensive charges will lower your returns and reduce the compound effect.
4 - Learn about tax efficiency
The banks are not the only ones looking to profit from you. The tax man will also want his cut and this can lead to some serious wealth reduction.
However, there are a number of ways to minimise the affects to tax, such as taking out an ISA (individual savings account), which is a tax free vehicle to keep your savings and investments in.
The importance of clearing debts
We have seen the positive effects that compound returns can have on your savings and investments; however there is also a darker side.
In the same way that banks pay interest on savings, they also charge interest on loans and credit card debts, and with some minor exceptions the interest charged on debts is much higher than that rewarded for savings, so it is the bank who will be benefiting from compound returns at your expense.
One big mistake people often make is to carry credit card debts, whilst keeping money in their savings accounts. This does not make sense because the savings may only be earning 5%, whilst the debts are costing 15%.
It is much better to concentrate on clearing your debts as soon as possible and then harness the power of compound returns in your favour.
Here's to your investment future
Remember it is possible for almost anyone to a develop a substantial investment income, just bear in mind the the positive and negative implications of compound returns, the importance of clearing debts and the benefits of turbo boosting savings and investments.
Investment is a great way to increase your wealth. For more investment advice and information on managing your money, visit http://www.Finance4Beginners.co.uk