Unlock your Wealth: the key to understanding how compound interest works to build wealth

There is a world where your money works as hard for you as you do for it. Welcome to the realm of investing, where strategic money management can empower Fearless Girls to create wealth and unlock the potential to build their dream life.

When you think of investors what comes to mind? Sharp-suited city slickers? Wall Street pits where crazed brokers shout their bids? The answer should be YOU.

Investing can seem overwhelming or frightening, especially for women navigating an arena that has often seemed to be a Boys Club. Read on to find out how you can overcome that fear and to gain an understanding how compound interest works.

I’m afraid of losing money on investments. Why should I invest my money when I have a secure savings account? 

The truth is that investing is for everyone. Even if you have consistent saving habits, if you are not investing, you are losing out. Historically, the stock market has provided returns of between 6% – 7% over the past hundred years. From 1960 –2022, the average rate of inflation was 3.8%. Keeping your money in a secure savings account may seem like a great idea, but as the cost of living rises, the value of your money decreases. Having your money invested in the stock market helps you to counteract that, through a concept called compound interest.

Ok, I’m interested in understanding how compound interest works! Tell me more?

Compound interest is the interest you earn on interest. To give a simple example, imagine you invested $100 into a global ETF and the interest rate was 7%. By the end of the year, you would have $107. If you kept the entire $107 invested and the interest rate remains steady, you would have $114.49 at the end of the second year. Not only did you make 7% on the original $100, you also made 7% on the interest from the first year. Although it may seem like a tiny amount, it will continue to grow and grow over time.

At the same rate of interest, someone who invests $100 and then adds an additional $100 each year 5 years, will have $755.58 by the end of the 5 years.

Compare this with someone who holds an HSBC e-Saver account. The rate of interest on that account (at the time of writing) is 0.15% if you have less than $20,000 saved in the account. In this case, by the end of the first year, you would have $100.15. If you continued to add $100 per year, you would have $603.01 by the end of the 5 year period.

That’s a difference of $52.57 and that is the power of compound interest.

It makes sense but…money management is the man’s job, right? 

Not true! Studies show that women actually make better investors than men, as we tend to use a more cautious and patient strategy, allowing our investments to do the work for us instead of trading frequently (and remember that each trade you make costs you a fee!).

And even though it may go against what we’ve been told about women being the emotional gender, women are more logical investors than men. According to a study by Hennick Wealth Management, high-income men are the social group most likely to make investments based on an emotional response or ‘gut feeling’. They are also the group most likely to be influenced to change their investment strategies by friends or colleagues. In contrast, the study found that over 70% of women who invest make a plan and stick to it.

I’m going to invest – how do I start? 

Fantastic! Be aware, it is always best to take a cautious approach at first. Do your research! Don’t jump into a risky investment without understanding what you are doing. There are fantastic free resources – start by reading this article on the 10 Steps to Investing Success and this one on the first investment you should make. You can also read books about investing or speak to a financial advisor (but be very careful about what products they encourage you to buy and how they structure their fees).

Once you are fully informed, you can start to make your plan. Make sure you are investing the Fearless Girl way, using a logical strategy based on research. Sticking to your plan will allow you to keep a cool head when others around you are frantically trading stocks. Now you can approach investing fearlessly.

What are these risky investments? And are there any more risks I should know about?

Yes.

Yes, there are. When you invest, you take the chance that your actual gains may differ from your expected gains. After all, there is no (financial) reward without a little risk. But it is possible to manage your risk using two simple strategies:

1. Know your risk tolerance and diversify your portfolio accordingly. The more risk you can bear, the higher proportion you can put into stock investments. The less risk you can bear, the higher proportion you can put into bond investments.
2. Avoid the 5 Most Common Investment Mistakes such as panic selling or jumping in and out of the market.

And as to the risky investments? Anything actively managed (such as a hedge fund) screams RED FLAG because of its high fees and complex manouevres. It might surprise you to know that gold is also considered a risky investment, as it experiences huge surges and collapses in market value.

I’m feeling Fearless…

Fearless Girls know that investing is not just a financial strategy; it is your tool to rewrite your financial narrative and pave the way toward the life you have always dreamed of living.

Are you going to start using compound interest to build your dream life? Let us know in the comments or tag us on Instagram @fearlessgirlfinance_