Monday 31 January 2011

The Money Snowball and Compound Interest

As a DIY Income Investor, when you save and invest - if things go well - you will experience the Money Snowball - when your savings seem to take on a life of their own and multiply without you having to do much to help.

It is like a snowball rolling down a hill gradually increasing in size as well as increasing in speed. You are getting richer, faster.

It can be difficult if you are just starting out saving and investing (at Level 1 on the Income Pyramid) - things may not seem to be moving very fast. However, after a while, although progress may be slow, you will begin to see a certain trend emerging - for example, by comparing today's total balances with those of two or three months ago.

We found the Money Snowball effect most noticeable when we were paying off our mortgage - as the balance came down we had more cash to pay off more of the capital, and so on over and over again, helping the Snowball to roll faster.

This Money Snowball is linked to the 'miracle' of compound interest.

And not just interest from savings, of  course, your income from shares and bonds/gilts will add to the effect, allowing you buy more income-generating assets to speed up your own Money Snowball.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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