A traditional bank would tell you of the “power” of compound interest. Compound interest is the interest that these institutions pay on the previous interest that you’ve earned and left in the savings account. Unfortunately, the low rates paid by traditional savings accounts make this superpower seem impotent.
Instead, replace the notion of compound interest with “profits on profits” and you begin to see many more possibilities. The power of compounding is in the reinvestment component. There are a number of ways to accomplish this, most at a better rate of return than traditional savings account interest. For example, you can reinvest your profits on the sale of a house into the purchase of another investment property. Alternatively, you can take the proceeds from your business to open another store. Investing the money from your service business into additional advertising also fits the profits-on-profits model.
Generally, reinvesting in what you know well, will provide a great balance between risk and return.
An Expanded View of Compound Interest
