What If I tell you that your savings can work really hard and earn money while you are relaxing or on vacation, it might sound like a cliché but this is what the smart investing really means. This is the foundation of smart investing, which can be very helpful in the longer run. If you understand the Compounding and how it can multiple your wealth, then no one can stop you to become wealthy.
According to Einstein - “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”.
Compounding is actually a magical and powerful force which might not be visible to you when you just get started with the investing. You will see the real magic after few years, so let's understand with an example. For example, you invest Rs 10K and you are investing with 10% compound interest. So at the end of 1 year, you will make Rs 1K and your investment grows to Rs 11K. Next year again you get 10% interest, and you investment will grow to Rs12.1K i.e. Rs 11K investment and Rs 1.1K interest. So let's see how much you will gain in 15 years if the interest is just 10%. So your money will grow to Rs 41772.38 after 15 years,
This is how much you will get with just Rs 10K one time investment. Think about the money you can make when you invest Rs 10K every year, and with compounding your money will grow like anything. The magic of compound interest is that you earn interest on the interest you have already earned. That means the Rs 1K which you have earned first year, is generating interest from the next year onwards.
You can actually apply a rule of 72 to simply find out the power of compounding. The Rule of 72 gives you the amount of time it will take for your money to get doubled. We have to divide 72 by the interest rate to know how long it will take for our investment to get doubled. So in our example, since we have taken 10% interest, using the rule of 72, our Rs 10K will double in 7.2 Years. And in 15 Years our money has doubled 2 times that means our money has grown to 4X.
And that's the reason starting early pays off because that can help you in the longer run. From the Rule of 72, we know that to double your money you have two variable, one interest rate and other time. The higher the interest rate, the investment will be risky. But higher the time with moderate risk, you money can grow exponentially. So when you start early you have more time for growth, and thus even if you invest less but regular you can accumulate significant amount of money.
Even if you have not started investing till now, start today without thinking about the lost days or years, because the compounding will have an effect. You have to start investing little extra but if you remain invested for longer period you will see the real magic of compounding. I too have started investing little late at the early 30s but by investing extra I am trying to regain the lost years. Not everyone can start investing early because of whatever reason, and that’s why it's better to start now because it's better to be late than never.
The important part here is that you keep investing and keep learning new things. It is not only the direct investment of money but is the investment of your time in yourself and since we have seen that the money has the power of compounding in the same way when you invest in yourself your knowledge get multiped exponentially. So you should not just think of investing the money but also think of investing in yourself. Just like the compounding effect on the wealth, you're learning or investment on yourself will have compounding effect on you.
