By Chinelo Audrey Ofoegbunam, Esq, ACIARb(UK), ACArb, AICMC, ACIS
Introduction
As a Nigerian lawyer, your time is your most valuable asset. Between court appearances, client meetings, and drafting contracts, it might feel like there’s little time left to think about building wealth. But what if your money could work for you while you focus on your legal career?
This week, we’re diving into the concept of compounding—often called the “eighth wonder of the world.” Understanding and leveraging this financial principle could be your first step toward long-term wealth creation.
1. What is Compounding?
Compounding is the process of earning returns on both your initial investment and the returns it generates over time. The longer your money is invested, the greater the growth, thanks to this snowball effect.
For example:
If you invest ₦100,000 at a 10% annual return, you’ll have ₦110,000 after the first year.
By the second year, your return isn’t just 10% of ₦100,000—it’s 10% of ₦110,000, giving you ₦121,000.
The key takeaway? Time is your greatest ally.
2. Why Lawyers Should Care About Compounding:
As legal professionals, you face unique financial challenges, including:
Unpredictable Income: Court fees or retainer agreements may fluctuate.
Busy Schedules: Time constraints can make active money management difficult.
Late Career Starts: Many lawyers spend years studying before earning significantly.
Compounding offers a solution. By starting early and staying consistent, you can grow wealth passively without needing to actively monitor your investments.
3. How to Leverage Compounding Effectively.
a. Start Early-
The sooner you begin investing, the longer your money has to grow.
Example: If Lawyer A invests ₦50,000 annually starting at age 25 and stops at age 35 (10 years), and Lawyer B invests ₦50,000 annually starting at age 35 until age 55 (20 years), Lawyer A could still end up with more money due to starting earlier.
Pro tip: Even if you start small, consistency is key.
b. Reinvest Your Returns-
To maximize compounding, avoid withdrawing your returns. Instead, reinvest them to generate even more earnings.
Example: Reinvesting dividends from stocks or mutual funds boosts your portfolio growth over time.
c. Choose High-Growth Investments-
The rate of return significantly impacts how quickly your money compounds.
High-Growth Options: Stocks, mutual funds, and real estate.
Moderate-Growth Options: Treasury bills and bonds (lower risk but slower growth).
Pro tip: While high-growth investments are appealing, always consider your risk tolerance.
d. Automate Your Investments- As a busy lawyer, automation helps you stay consistent without extra effort.
Set up standing orders for monthly contributions to savings or investment accounts.
Use apps like PiggyVest, Risevest, or Bamboo to automate your investments.
4. The Role of Inflation in Compounding:
In Nigeria, inflation can erode the value of your savings. Compounding helps you stay ahead of inflation:
Aim for investments with returns higher than the inflation rate (e.g., stocks or dollar-denominated assets).
Avoid keeping large sums in low-interest savings accounts, which often fail to outpace inflation.
5. Mistakes to Avoid
Delaying Your Start: The cost of waiting is significant. Begin investing as soon as possible.
Interrupting the Cycle: Withdrawing returns early disrupts compounding.
Ignoring Diversification: Spread investments across different asset classes to reduce risk.
6. Tools to Help You Compound Your Wealth:
Here are a few platforms and options to get started in Nigeria:
For Mutual Funds: Stanbic IBTC, FBN Quest.
For Stocks: Trove, Bamboo, or Chaka.
For Dollar Investments: Risevest, Cowrywise.
For Real Estate: Coreum, Wealth.ng, Lawyers in business Institute.
These tools simplify investing and help you stay consistent, ensuring your money grows effortlessly.
Conclusion:
Compounding is a powerful tool that can transform modest investments into significant wealth over time. As a lawyer and legal practitioner with a busy schedule, the best financial decision you can make is to start early, stay consistent, and let your money grow passively.
Remember: The journey to financial freedom doesn’t require dramatic steps. It’s the small, consistent actions—like embracing compounding—that make the biggest impact.
What will you start investing in today to harness the power of compounding?
