Compound Interest means gaining ‘interest on interest’. In simpler words, compounding means reinvesting the interest you gained on an investment, as against depositing it in your bank account or using it up. Let us introduce you to the benefits of investing early and consistently by capitalizing on the power of Compound Interest.
Start Early
It often turns out to be their only biggest investment blunder when young people ignore the need to invest early in life. Investing early is the surest way to maximize on the power of compound interest. The sooner you start investing, the higher is the interest earned. Similarly, the more years you stay invested, the larger is your investment base and the higher is the interest on it, thereby presenting you an enhanced return. In case you haven’t started yet, there is no better time than to start now. Pushing your investment plans to another year can make your retirement goals seem too difficult to accomplish.
Invest Time
The power of compounding doesn’t materialize overnight. You need to invest time into it too. Have patience and hang on. Initially, you don’t seem to be making much profit but if you stay invested for a bigger period of time, say 20 years, the profits really start to pick up the pace.
Do not let the short-term gains fool you. On the path to riches, you must focus on the long-term goals. The immediate gains are nothing as compared to the sum that you can make in the coming 20 to 30 years, provided you keep investing consistently. Compounding works solely if you let your investment grow. The thrill of compounding returns appears at the extreme end. It is kind of a snowball effect, at first it seems small, but gradually rolls into an enormous sum.
Consistent Reinvestment
The most favourable outcome of compounding is experienced when you reinvest the interest earned. Over the time, the increase in the investment base when the interest has been reinvested instead of used up is extraordinary. Stay disciplined during the investments and save enough to maximize your inputs.
To understand the extraordinary power of compound interest that every investor should know, check this example:
A 20 year old boy makes an one time investment of INR 5,000 at an average 8 percent interest rate per annum. If the person doesn’t touch the money for another 40-45 years, his INR 5,000 will jump to nearly INR1, 80,000 by the time he is 65. This shows the money earned rises way above the original investment progressively over the time. However, this is the case when the guy decided to make an early investment. The situation would have been a lot different if he waited till the age of 40 to start investing. In that case the initial amount of INR 5,000 would have grown to a meagre INR 40,000. The 20 years duration cost him more than INR1, 30,000!
Another example on the same lines will depict the benefit of regular investments. If the guy contributes INR 5,000 yearly to his investment plan for coming 45 years at an average 8 percent interest rate, his retirement funds would rise to over 20 lakhs. This happens because his investment base increases every year with the extra amount he adds to his contribution. Stupendous!
Hope this explains the extraordinary potential of compound interest! Are you ready to compound your Money? Share us your thoughts in the comments. Stay Invested! Stay Happy!