This page shows how Compound Interest influences an investor's wealth over time
Magic of compounding...8th Wonder of the World!!
To build wealth, most people try to take short-cuts and end up wasting their time or squandering what little wealth they have. Make no mistake, there are no real shortcuts unless you get lucky and win the lottery. The foundation of building wealth starts with establishing the right mindset and following through on a few basic principles.
The 1st basic principle that anyone who wants to succeed in investing should understand is the concept of Compounding. It is the most powerful financial concept that can greatly magnify the results of one's investments. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” It’s probably the secret behind how credit card companies grow into global behemoths. If they can do it, so can you.
The trick is to “Earn It and not Pay It.”
What is Compounding?
Compounding of returns happens when both your initial investment amount and the accumulated returns grow together!! Therefore, Compound interest can be thought of as “interest on interest,” and will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount.
Thanks to compounding interest, it doesn’t really take much to build your wealth over time. The key to amassing a fortune is by constantly contributing to the overall pot as often as possible and allowing the money to work for you and grow itself. Remember that it doesn’t take much additional money to have a profound effect on one's wealth. Covet your cash and don’t let go it too easily. Before you make a frivolous purchase, consider the ramifications on your overall future wealth.
CLICK HERE to see the amazing power of the Concept of Compounding!
How Compounding Works?
Imagine 2 people - 'A' aged 26 years & 'B' aged 40 Years, both of whom want to accumulate a retirement corpus of Rs. 1 crore by the age of 60 years. Assuming they both earn the same return of 8% p.a. post-tax on their investment, let's calculate how much amount each of them needs to invest monthly:
Getting started with investing as early as possible can make a big difference in how much wealth is ultimately accumulated.
How to Benefit from the Concept of Compounding?
These are three important things to remember when you want to take advantage of the power of compounding.
1. Start Early - As one adds more nos. of years to one's investment, the final value of the investment grows higher & higher. CLICK HERE to see how starting early leads to unimaginable benefit!!
2. Invest Often - Even adding small amounts periodically to your investments give unimaginable boost to your wealth over the long term.
3. Invest In the Right Assets - A higher rate of return will result in a higher final value for your investment. So where can one invest to get good rates that compound? Most banks today only pay up to 9.5% interest on their 5-year deposits, which is fully taxable!! So cross that out of your list. The easiest way to earn approximately 13-15% compounded return over long tenures (8-20 years - Remember the impact of no. of years on compounded returns!!) is to invest in an Equity linked instrument or an ETF that tracks the stock indices.