“Compound interest is the eight wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” ― Albert Einstein
As time progresses some things just get better..
Red wine gets an enhanced taste while aged cheese is so much more tastier.Don’t you agree?
Now what’s with Money?? It grows.. grows with time…
And why?? Because it gets compounded.
So what’s compound interest exactly? Its earning interest for interest already earned. In other words, your interest on savings also earns interest. Suppose you deposit some money in your account today, there will be an increase in the value of it after a year. And, that’s because it has earned interest.
The journey to wealth can begin with even keeping aside the smallest amount each day.
Don’t believe?? The picture below says a thousand words.
Rs. 15000/- invested per month for 20 years will turn into more than Rs 1.13 crores.
On the contrary, if you left it in a savings account, it would be worth something in the region of Rs 36 lakhs.
And the best part about enjoying the power of compounding is:
You don’t have to be rich to see its benefit; but you can become rich in the process
You can start from today; so why not start now?
The more time you give it, the fatter balance you can enjoy with, later.
In our seventh grade maths we were taught a powerful return formula called compounded return.
You can start from today; so why not start now?
The more time you give it, the fatter balance you can enjoy with, later.
In our seventh grade maths we were taught a powerful return formula called compounded return.
Amount = Principal X (1 + return) ^ holding period of investment X 100
Relax, I am not testing your seventh grade knowledge. I just want to let you know that the return in the above mentioned formula is known as Compounded annual growth rate (CAGR). The manipulated formula for this return, which is also called CAGR is given by:
= ((Ending value/Beginning value) ^ (1/holding period of investment) – 1) X 100
Let’s say Rs 1 lac became Rs 1,16,664 lacs (8% p.a.) in 2 years. Calculate CAGR
= (1,16,664/100000)^(1/2)-1 X 100
= 8% p.a.
CAGR is the most powerful tool to assess performance of your investments. Now an LIC or bank agent cannot fool you by saying if you invest Rs 5 lacs today, after 15 years you will get ~13 lacs, a return of 157%. Because you would know that CAGR for this investment would be mere 6.5% p.a. which does not even meet inflation rate. This invest will eat up your wealth rather than generate any return for you.
However, it’s not as easy as it sounds else everyone would have been a millionaire by the time they retired. The good news is that with a bit of planning, you can reap the benefit of compounding. As a first step, you will need to plan your expenses in such a way that you save 20% of your income every year. Secondly, your savings need to be invested in such a way that they provide you with consistent return. Start with a monthly Systematic Investment Plan (SIP) with 3-4 mutual funds. The practice of investing into an SIP will force you to get into the habit of saving regularly and reap the benefit of compounding.