When you invest money, you earn interest on your capital. The next year you earn interest on both your original capital and the interest from the first year. In the third year, you earn interest on your capital and the first two years of interest. You don’t get just the interest on capital, but also interest on interest.It does not matter if you are unable to come up with a big initial investment or trading capital because if given enough time, you could end up with a lot more, hopefully. And when your investment or trading account grows, withdraw some money to transfer back to your savings account for safe-keeping. Remember, it is not how much money you make from your job, but how much you invest that will determine your wealth.

Tips on how to capitalize on the power of compound interest:

1. Time is the most powerful asset when it comes to investing. The earlier you start investing, the more time you leave for the miracle of compound interest to take effect.

2. Think of ways to increase your rate of return, even if it is by 1%. Over the long term, this 1% more will make an enormous difference. Most traders and investors overlook the fact that brokerage fees and/or commissions could affect your rate of return. To understand the role of commissions, you must compare them to your margin, not to the contract value. For example, if you pay $30 in commission on a trade which requires a margin of $600, that $30 commission represents 5% of your margin. It means you have to make 5% on the capital committed to the trade just to break even.

3. Regularly set aside money for investing. Once you are confident with your trading or investment, it helps if you can regularly assign more capital for trading or investment. However, don’t allocate all your trading capital into the trading account as it is better and safer to put aside that money in your own savings account even though that money is really meant for trading purposes. The reason for this is that it can be quite risky to put a lot of money in a trading account which you can lose if the brokerage firm were to close down. Giant brokerage firms do and can collapse, as history has shown (Look what happened to the giant Refco).

4. Patience. Making a million isn’t something you can do overnight even if you study, learn or trade intensively. The true glory of compound interest only shows with time. Set realistic goals, and make a detailed plan of how you can get there. If you rush your monetary goals, you may end up feeling disillusioned or demoralised should things not work out within your specified timeline.