The most valuable financial lesson you can give to anyone is how to harness the power of compounding to one’s advantage. This life lesson is best learned early because the benefits grow exponentially the sooner you start it. The power of compounding works by growing your money exponentially. It adds the profit earned back to the principal amount and then reinvests the entire sum to accelerate the process. Thus, it creates a chain reaction by generating returns on the returns as long as your money remains invested.
What Is Compound Interest?
Compound interest is the addition of interest to the principal sum of a loan or deposit,
or in other words, interest on interest. It is the result of reinvesting
interest, rather than paying it out, so that interest in the next period is
then earned on the principal sum plus previously accumulated interest.
interest is contrasted with simple interest, where previously accumulated
interest is not added to the principal amount of the current period, so there
is no compounding.
interest makes a sum of money grow at a faster rate than simple interest,
because in addition to earning returns on the money you invest, you also earn return
on those returns at the end of every compounding period.
Formula to calculate Compound Interest:
A = P(1 +
A = Amount (Future Value)
P = Principle (Initial Value)
r = Interest rate
n = number of times compounded in one ‘t’
t = time
Why is It Important to start Now?
way to take advantage of compounding is to start as early as possible. The
earlier you start investing, the greater will be the compounding impact. The magic
ingredient that makes compound interest work best is time. Compound interest benefits those that start early, which is why it pays to start now.
Few Reasons why Compound Interest is Valuable:
Compound interest a greater teacher of patience. You will have to allow your investment to grow at its own pace without meddling with it and expecting to see results overnight.
You can’t expect to time the market. That’s why you must employ a system like Rupee Cost Averaging. Compounding is best pursued when you are Rupee cost averaging. Compound interest rewards investors for staying consistent and disciplined. So, define your financial goals and be disciplined and regular.
The work you need to do in the beginning is often painful and tiring. It takes some time and effort to build up at first and then it begins to rapidly grow. But once your wealth is built, then your wealth creates more wealth.
Get Started Early:
If you want to accumulate wealth and take advantage of the magic of compounding, it’s important to start early and be regular and consistent. The key is to start now, it may seem like it’s not worth it, but even small contributions per month add up over time.
your best friend and is the one thing that makes compound interest so
effective. Saving now and starting early will pay dividends in your future and
help you accumulate a large sum.
For example, If you invest Rs. 5,000 every month and the interest on
this amount is 10% per annum. The below table reveals how your investment
returns would look like over time:
Expected amount (In Lakhs)
Amount invested (In Lakhs)
Wealth Gain (In Lakhs)
It is crucial to start early and
when you do this regularly for an extended period of time, you stand a chance
to maximize your wealth creation and benefit from the full power of compounding.