Magic of Compounding
Luckily for us, we do not need the intelligence of albert Einstein to understand the power of compound interest! This simple concept is taught in high school.
Here is an example:
- Imagine you invest Rs. 10000 for 10 years. The rate of interest is 10% per year
- At the end of year 1, you will earn Rs. 1000/-. Thus your invested amount will grow to Rs. 11000/-
- At the end of year 2, you will earn Rs. 1100/-… and so on.
- Finally, at the end of year 10, you will earn Rs. 2358/- for that year, while the initial sum of Rs. 10000/- will grow to around Rs. 25940/-
Basically it means that when you invest for long periods of time, you start earning interest on interest. On the other hand, if you were earning simple interest, you would have only earned a flat sum of Rs. 1000/- per year for 10 years and the total amount would have grown to Rs. 20000/-
The difference of Rs. 5940/- is because you have earned interest on interest.
In a nutshell, compound interest is the magic of earning interest on interest.
Amazing, isn’t it ?
Here is an example of how compound interest can convert smll smavings into large numbers:
Just Imagine this: You are a young 20 year old “branded” coffee lover.
Now, assume one day you opted to drink the neighbourhood Udipi restaurant coffee, costing Rs. 25/- over the fancy one, costing Rs. 125/-.
Further, you invested the difference of Rs. 100/- at 15% per year for the next 40 years. Can you estimate how much this Rs. 100/- would grow to ?
The answer is Rs. 26786 !!
Now Imagine you saved and invested Rs. 100/- everyday. Do you still desire that fancy coffee?
There is a simple and sure formula to get rich. Save and Invest early and let the magic of compounding do the rest.
