Power of Compounding.

Wealth is not created by earning windfall income once by speculation or gambling. Creating wealth is an art, and it can only be attained by skilful handling of one’s resources. Patience and discipline lead to wealth management and creation. No matter how small an amount you set aside, it all gets accumulated in the ocean you want to see. We all tend to ignore the power of compounding which is the only accelerator of building up a great corpus.

Rule of 72

To achieve lifetime financial security, you want your money to grow many times larger than its original value. With the power of compounding at work, you can easily know when your money would be double.

Rule of 72 helps you to check out when you can double your investments. It is simple all you need to know is the rate that you earn on your investments. Say the rate is 8%, and then simply divide 72 by 8. The result is 9. Which means your sum would double in 9 years.

Magic of Compounding

Even on a small amount you start saving, the magic of compounding works on that as well. The longer your money is invested, the better compounding works for you. The earlier you start the lesser you need to save for a goal. If we plan to buy a house for ourselves in two years then definitely we need to save a lot, and may be that saving too is not enough to help us reach the figure we desire. But if do it over a span of 10 years then probably the situation would be a lot more comfortable. 

The power of compounding can be best illustrated as by following examples.

Example 1:

Suppose, Mr. A and Mr. B is working in the same office. The age of Mr. A is 30 years and Mr. B is 35 years. They are planning to save for their retirement. Based on the requirement, they have come to a conclusion that Rs 1 crore will be enough for their retirement corpus respectively. The retirement age is 60 years, in this case.

Now, for Mr. A Rs 1 crore is to be accumulated after 30 years.

Mr. B has only 25 years’ time to accumulate the retirement corpus i.e. Rs 1 Crore

If we consider 10% as the annual interest rate Mr. A has to save Rs. 4423 per month whereas Mr. B has to save Rs. 7537 per month.

Hence, Mr. B has to save Rs. 3000 per month more than Mr. A to achieve the same goal because he has set the target 5 years later.

	Mr. A	Mr. B
Goal to be Achieved	Rs 1 Crore	Rs 1 Crore
Time to achieve	30 years	25 years
Interest rate	10%	10%
Amount to save per month	Rs 4423	Rs 7537

Example 2:

Let’s consider a person of 20 years old wants to save Rs 5000 per month. The investment is growing at 12% per year. After, 20 years the value of accumulated investment is approx. Rs 46 lakhs. If the person continues to invest for another 5 years, the wealth would be Rs 85 lakhs. And at the end of 30 years, the value of the total investment is Rs 1.5 crore.

From the above example and graph, you can easily follow the difference between initial years and last few years of investment. In the last five years of your investment, the investment is grown by almost Rs 65 lakhs. Hence, start investing from today. If you take the investment decision late, the wealth creation will be harder and harder.

Power of compounding calculator.

https://www.moneycontrol.com/personal-finance/tools/magic-of-compounding-tool.html

5. Don’t buy stuff you don’t need.

This life lesson is  from the widely known, highly popular column by Regina Brett. “45 lessons, written by a 90 year old”