You know the phrase ‘it takes money to make money’ – it is one of those concepts intrinsically fixed into our psyche that prevents the average person from building wealth.
The theory makes sense – unless you are able to invest a large sum of money, it is highly unlikely that you will see any sort of substantial return on your investment. Even earning a return of £10,000 will easily require an investment of £100,000 or more, so if you only have £1,000 or even £100 spare to invest, what hope do you have in earning anything close to that and why bother investing at all?
It is no wonder therefore that getting over the ‘big bang’ or ‘home run’ approach to investing is probably the biggest hurdle that people face on their wealth creation journey.
Unless you are a city banker, lottery winner or just inherited an estranged uncle’s family fortune, you probably earn a fairly fixed wage or salary, out of which you pay all your bills and hopefully have a little left over at the end of each month – but certainly not enough to be investing £5,000 or £10,000 at a time on the stockmarket.
However there is absolutely no reason why should have to make these big time investments. In fact the best way is to invest and grow your wealth is to make regular small incremental investments, which over time will combine and grow into significant wealth.
To better visualise how your small investments can eventually turn into a wealth behemoth, consider the snowball effect. When the snowball initially starts rolling down the hill, it is very small and travels relatively slowly. However with each rotation, it absorbs additional snow and grows bigger and faster, eventually becoming boulder-like in size and force.
The same principle applies to investment. Imagine you invest £100 a month and that you are fortunate enough to earn a 10% ROI (return-on-investment).
By reinvesting that money, your overall investment will have grown by £120 (£100 x 12 months = £1,200 + 10% (£120) = £1,320). Not a particularly huge sum of money admittedly, but if you continue investing the same amount next year you will have acquired £2,520 and assuming you earn 10% ROI, the return will be £252. Re-investing this will give you an overall value of £2,772.
The sums of money at this point are still relatively low, but by continuing to invest as much spare cash as possible and re-investing your returns, the overall value of your investment will begin to snowball into significant wealth.
It is worth noting that this is a fairly simplified example and that there are other variables that will impact your investments such as stockmarket performance. The 10% ROI is just for example purposes and entirely dependant on the type of investment you make, however it hopefully demonstrates how people on average incomes can grow their wealth.
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