The purpose of saving is to make sure that we create wealth for a rainy day or for our long term financial goals. But this is not simple, one must know how money grows. Is there a formula? Yes, and MoneyWorks4Me calls it the wealth-building formula.
Wealth = Surplus (1 + returns) ^ years invested
What this formula implies is that the wealth that you create for the future is nothing but your current surplus earning returns compounded for a period of time (years invested).
Here, all three variables, that is, the surplus (non-utilised income which can be used in the future, returns (compound annual growth rate), and the number of years you stay invested are essential for your eventual returns. Let us now explain how this formula helps one understand how important sensible investing is in the course of wealth building.
It would be sensible for any investor to focus on the one variable that they have maximum control over, which is years invested. This will allow his money to compound for as long as possible. It is also important to have sensible expectations regarding returns. While they have to be substantially higher than inflation rates, they must not be so high that they breach the risk appetite of the investor.
Investing in stocks or any other financial instrument should be done in a way that the investor is confident and does not incline towards exiting the market.