What an impact can power of compounding have?
If you start walking towards the moon, and start 1 step on the first day and double the steps every day, How long do you think it will take to reach the moon? 2 years? 20 Years?
Let’s find out!
Within 30 days, you will cover over 3.84 lakh kms and reach the moon.
Yes, it will just take 30 days.
But what if you delay by 15 days? You will cover only 11 kms.
That’s the power of compounding.
As Albert Einstein says “Compounding interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t pays it.”
In simple words power of compounding means the increase in the value of investment, due to the interest earned on the principle, as well as the accumulated interest.
For example, if you invest an amount of Rs.1 Lakhs for 10 years in different investment avenues at different compounding rates as shown in the table.
| Investments Avenue | Rate of Interest | Maturity Amount |
| Savings Account | 2.75% | Rs.131165 |
| Debt Fund | 6% | Rs.179084 |
| Equity Funds | 12% | Rs.310584 |
| Shares | 15% | Rs.404555 |
The longer your money can remain uninterrupted, the more your wealth can grow with the help of compounding.
Suppose you invest an initial capital of Rs.1 lakh @ 12% compounding rate for different time duration as shown in the table.
| Years | Maturity Amount |
| 10 | Rs.310584 |
| 20 | Rs.964629 |
| 30 | Rs.2995992 |
| 40 | Rs.9305097 |
Key Rules for Compounding
Control your Expenses
The best way to harness the power of compounding is to raise your investments. But if you have a limited income, you can increase your savings by controlling your expenses. One way to do it is to create a budget and identify areas you can reduce your costs each month. Spending wisely and smartly can increase your savings and you can invest more. This way, you stand a chance to reap better returns.
Starting Early
You must start early with your investments to make the most out of the power of compounding. For example, if you put your money into an investment plan as soon as you start earning, you can enable your savings to grow significantly over time.
Discipline
To create a healthy corpus and meet your financial goals on time, it is critical to have investment discipline. Investing regularly at the start of your investment journey can ensure discipline. It is wise not to skip your SIP payments. When you regularly invest month after month, you not only increase your savings but also develop investment discipline. This is a vital habit if you wish to achieve financial success.
Be patient
Most investors look to chase quick returns. But in the attempt to earn quick money, they can make mistakes that could result in big losses. As we know, the power of compounding magnifies over time. Hence, it can help to have a long-term approach towards investing. One must invest patiently that could reap healthy returns over time.
You don’t need to be a financial expert to benefit from the power of compounding. Every investor can take advantage of this concept and put it to good use.
However, when invested over the long term, the difference in terms of value is huge.
One comment
Shailesh Shah
July 3, 2021 at 8:48 am
Very good article and lesson for new youngsters who wanted to make money very fast