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Understand The Power Of Compounding

  8/4/17 8:47 AM

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  8/4/17 8:47 AM   |

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One great aspect about the financial world is it’s a lazy person’s paradise. Invest, or better yet, invest regularly and just sit back. You’ll see your money grow like a time lapse video. However, it’s NOT a procrastinator’s game. And yes, there is a difference.

“Let me think about it, I’ll start exploring my investment options tomorrow.” NO!

“I’ll start investing next week.” NO!

“I’ll definitely start investing next month.” (Of course you will!)

The more you delay, the more you pay. It’s all in the rhyme.

Our reasons will NEVER end. We are humans after all. But money will, it always does for the dis-organised. If you are able to manage properly (and we can help you with that), you won’t have to put your hand in an empty pocket – ever. Investment is the name of a very simple game we all can play, and it has an even simple cheater’s code compounding interest. So let’s master it.

What’s the basic aim of any form of investment? Wealth Creation! Creating wealth is an art; and art takes time. A lot of people have a misconception that to get huge returns, you have to make a huge initial investment. That’s not exactly the case. Be patient, be disciplined, be regular and you WILL make money! No matter how much you hate long term plans, eventually long term investment is what will fetch you the kind of savings you dream of, no matter how small an amount you set aside every month. This is:

The Power of Compounding: The Bridge Between Your Dreams and Reality

Power of compounding, simply put, means earning ‘interest on interest’. Play your cards right, and you’ll see an exponential growth in your investment no matter the amount. As we said earlier, duration is the key. Let’s see how the magic of compounding does wonders.

Here we’ll look at the projection over a span of 30 years on a yearly investment of Rs. 5,000 at 8%.

Though annual investment remains same, the compounded return does not increase proportionately. Harshal is now 20 years old and Vaibhav is now 30 years old. Both have 40 years and 30 years, respectively to retire. Harshal, following the advice of some of his seniors, decided to start investing early on.

Just to make interesting, let’s say Harshal wants to invest Rs. 5,000 for the next 20 years (at compound interest) and then let’s his overall corpus grow till he attains 60 years of age, whereas Vaibhav invests till his retirement (at simple interest).

This is a very good example focusing on the importance of ‘duration of investment’.

Since Harshal invested 10 years less than Vaibhav, his contribution was Rs. 50,000 less than Vaibhav. Does that mean Harshal is bound to get less returns than Vaibhav? Astonishingly, no! Vaibhav gets a return of Rs. 6,00,000 for remaining amount invested for 30 years. But look at Harshal’s returns. He gets Rs. 11,50,000. The difference in investment was Rs. 50,000 but the difference in returns is Rs. 5,50,000. Surprised?

So now you know why we call the power of compounding, magic! Start investing early, your money will start multiplying like cells. Just that it will be the opposite of ‘microscopic’ when you’ll get your returns.

Remember, once you start investing at set intervals, you can be as lazy as all you want. But NEVER procrastinate.

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