It seems everywhere you look online, experts are talking about the magic of compound interest and how it can make you wealthy over time.
But if you have no clue what that even means, it’s basically when you earn interest on both the money you’ve saved and the interest you earn. It can be highly profitable.
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So, who are these lucky people getting rich from it?
GOBankingRates spoke with self-made millionaires Nathan Thorne, CEO of a Handy Flowers, and Max Williams, founder and CEO of Herobot.app, to discuss how they have leveraged compound interest to create financial freedom for themselves.
“If there is one thing I have [learned] as an entrepreneur in the gardening sector, it’s that business and finance need seeds to grow over time,” Thorne said. “One of the most valuable lessons in finance that running a successful gardening business taught me was patience. This means creating a garden-like atmosphere where the wealth is built through compounding interests.”
Both experts share how compound interest played a significant role in their wealth-building strategies — and the steps they took to harness its power.
Invest Early and Consistently
“Right from inception, even at low income levels, I made saving for long-term investments my main focus while starting my business,” Thorne said.
Inception, he explained, began with consistently small inputs into low-cost index funds, realizing it was all about time.
“For instance, irrespective of its minute nature, 10% to 20% of what I earned from the business would find its way into investment accounts.”
These investments grew over time not only due to the initial capital but also compounded earnings, which allowed him to reinvest them into multiplying returns.
Williams equally cited investing early and consistently as the first step he took toward wealth building.
“When I first began my career, I was acutely aware that time is the most valuable asset when it comes to compound interest,” he said.
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For this reason, he set aside a portion of every paycheck, no matter how small, and consistently invested it in diversified, low-cost index funds.
“This might seem basic, but the power of compound interest really shines when you give it time to work its magic,” he said.
That said, Williams also noted that one of the most impactful decisions he made early on was to automate his savings and investments.
“By setting up automatic contributions to my investment accounts,” he said, “I removed the temptation to spend that money elsewhere and ensured that I was steadily building wealth over time.”
Reinvest Every Dollar
“These days, just like how much investment is needed for growth, this means reinvesting everything on return back into each investment account automatically,” Thorne said.
To improve on compound interest, he said it is important to stay the course without thinking about making money.
“This is similar to what happens in farming or horticulture,” he said. “Continuously putting back every gain you make into soil, equipment and plant is what you need to do in order to see your garden flourish in the long term.”
As far as finances are concerned, he said, “Reinvestment is the manure that makes compound interest grow to its fullest.”
Williams agreed that this was a key move for him as well, to reinvest all the returns he earned, whether they were dividends, interest or capital gains.
“Instead of taking out the money or using it for immediate gratification, I allowed it to compound,” he said. “This means that not only was I earning interest on my initial investments, but also on the returns those investments generated.”
Reinvesting returns might seem like a small decision, Williams explained, but it has a profound impact on your long-term wealth.
“By allowing your returns to generate even more returns,” he said, “you effectively create a snowball effect where your wealth grows exponentially over time.”
Leverage Business Profits for Investments
Running a gardening business has its ups and downs, but Thorne quickly learned how to channel any revenues made from it into investments.
“Instead of using up my extra income,” he said, “I would direct it towards high-growth tax-advantaged accounts such as SEP IRA where I could gain both tax benefits and compound interest growth over time.”
He said this cushioned him against the business cycle and provided him with an avenue to create wealth outside his immediate business interests.
Get Educated on Financial Instruments
“I didn’t just blindly invest,” Williams said. “I took the time to educate myself on the different financial instruments available.”
Understanding the difference between simple interest and compound interest, and knowing which investment vehicles maximize compounding, was crucial for him.
For example, he focused on tax-advantaged accounts such as Roth IRAs and 401(k) plans, which allowed his investments to grow tax free or tax deferred, further accelerating the compounding effect.
“Education is key,” he said. “The more you understand about how compound interest works and the various tools at your disposal, the better equipped you are to make decisions that align with your long-term financial goals.”
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This article originally appeared on GOBankingRates.com: I’m a Self-Made Millionaire: How Compound Interest Set Me Free
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