Compound Interest – Let your money work for you
Don’t always work for money. Instead make money work hard for you
“Let your money work for you”
I think we must have read / heard this saying many times in life. This is quite a famous quote often used by investment advisers. This is related to power of compounding which is very powerful tool if exploited properly.
If you are someone who wish to have good returns on your investments, wish to retire early, wish to have financial independence you need to exploit power of compounding and make it one of the pillar of your overall financial independence strategy.
I will just give a small example to reiterate the faith in this strategy. For assumption, I have taken 10% as returns on investment which is quite possible in today’s scenario.
If you save INR1,000.00 per month for 12 months, at the end of the year you will be left with INR12000.00
You will earn 10% interest making total amount INR12,000.00+INR1,200 = INR13,200
You will earn 10% interest on INR13,200 and total amount would be INR13,200+INR1,320=INR14,520
You will earn 10% interest on INR14,520 and total amount would be INR14,520+INR1,452 = INR15,972
You will earn 10% interest on INR15,972 and total amount would be INR15,972+1,597=INR17,569
You will earn 10% interest on INR17,569 and total amount would be INR17,569+INR1,756 = INR19,325
So in 5 years, your initial investment of INR10,000 turned to INR19,325 – You have almost doubled your investment without doing anything
Now, to show the outcome of consistent investing, let’s take a scenario where you invest INR1,000 per month for 5 years that is 60 months and let’s see the result.
You have invested INR12,000 and your total amount after 12 months stands at INR12,665
You have invested INR24,000 so far and your total amount after 24 months stands at INR26,645
You have invested INR36,000 so far and your total amount after 36 months stands at INR42,076
You have invested INR48,000 so far and your total amount after 48 months stands at INR59,110
You have invested INR60,000 so far and your total amount after 60 months stands at INR77,911
If you continue this investment for 15 years your INR1,000 per month investment becomes INR4,14,774
If you continue this investment for 25 years your 00 per month investment becomes IR13,19,273
————Here the magic unfolds ————
If you replace investment amount by INR5,000
If you continue this investment for 15 years your INR5,000 per month investment becomes INR20,73,872
If you continue this investment for 25 years your INR1,000 per month investment becomes INR65,96,367
So your INR5,000 per month investment for 25 years @ 10% per year will yield you INR65,96,367
This is simply a huge amount and can give you a big shot in your retirement Kitty.
You can use any compound interest calculator and tweak rate of returns and amount to see the magic. You will be surprised.
Idea is to find an avenue which gives you maximum return on investment for your risk appetite and to stay invested for a long time (>15years) to reap the benefits of compound interest. Compound interest works miracle with large sum invested for a long duration. The best part is it’s a passive income for you as your money is working for you.
Start as early as possible -> Make regular investmsnts -> Stay invested for a long duration -> Reap the benefits of Compounding
If you delay by a year, you will loose lot of money. Don’t think that you will loose only first year’s interest money if you delay by a year. You will loose interest of the final year if you delay. Do your basic math and you will come to know the losses.
No doubt great Albert Einstein has summed it up correctly
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”