Compound Interest is the real deal breaker for Investment!
Can we invest once in a quarter? Can we expect the investment to double in 6 months? Is this going to be the safest mode of investment? And the questions keep springing up in our mind until we get the answers in a form of guarantee, isn’t it?
Let’s have a reality check!
Have you ever seen a seed growing into a tree until it is not planted and watered regularly?
Have you ever seen an athlete claiming that he/she began to run at a certain speed all of a sudden in one night?
“Power of compounding is the eighth wonder of the world,” said Albert Einstein.
All you have to do to achieve this eighth wonder is to understand two basic principles, first make sure to invest as early as possible and give time to your investment and secondly remain invested and let it grow. Do not retreat your money in between. These two principles make money making simple as a piggy bank to your kid.
If we can construe the easiest way to break the meaning of Compound Interest, it means nothing but to commit the interest earned at the same rate so that it yields additional payoffs at an equal rate thereafter.
Why not try it with an example?
Supposing you fetch a 10% return in a year for the investment of र10,000/-. At the end of that year it would grow up to र11,000 and the next year after that you will garner a return on र11,000/- and not on an original investment of र10,000/-.
We know the majority of you know this, the real question is what makes this compound interest system so important is this domain of investment? How is it going to help an investor fill in his bags?
If we would have to explain this compound interest in the language of an investment, we would tell you a story of two friends Manish and Satish. Manish is more of a spender but somehow he manages to invest र5,000/- every year for the first 10 years, later he could not save anything so he stops investing. However, he gets a compound interest rate of 15% on his money for 30 years. Whereas, Satish was busy in his family and career life but happens to realize it is high time he starts investing so from the 11th year he starts investing र10,000/ every year (Manish knows Satish is investing double the amount he had invested) for the next 20 years. Like Manish, he too gets a compound interest rate of 15% every year.
So basically, Manish had committed र50,000/- and Satish invested र1,00,000/-. When they both decide to check their current position on their respective investment at the end of 30 years, Satish sees that he had made a sizeable र16.61 lac whereas Manish made र10.24 lac. They both understood that this is the magic of compound interest for Satish. The difference of र6.4 lac was because Manish stopped investing after a certain period.
You portfolio needs two basic logic to yield a compounding impact which are stated below:
- Don’t count the amount before investing, no matter how small the commitment is to start investing early in your life. The focus should be on saving some amount; ideally, it should start from your first salary.
- Consistent growth is the key to success of an investment, but rule being you don’t withdraw it in between. When you start to invest early, you have time on your side and you can expect a good return on possible asset group like equity to yield a positive return and generate higher profits over a period of time.
It is not important how much you water the plants one day, more important is how regular you have been watering it to taste the fruits it will give in the future…
This canonical ‘Rule of 72’ might give you a better understanding to this concept.
Basically, it gives you a doubling period. In simple language, it tells you the calculation of how long will your investments take to double its value. This rule says that to know doubling period you divide the compound rate of return into 72 and you get doubling period in number of years. e.g. if your investment generates 12% return then 72/12 = 6 is the number of years required to double your money.
Supposing you plug in your money for 9% in an FD, you will need 72/9 = 8 years to double your money whereas if you invest it in an asset class where it generates 15% you can double your money in 4.8 years. This is the magic of compound interest. If you have your financial planner they will definitely explain compound interest to you with some real time examples.
After all, we know “Rome was not built in a day”. We need to build Our Rome brick by brick.
So all we go to do is “Keep Planning and let it keep Compounding!”
For everything else, Money Anna is always there.