Power of Compounding.

Power of Compounding

Meaning of Compounding

Power of compounding

In simple words compounding means that the returns on investments themselves become part of the investments and start generating returns.

Compounding earnings can shoot-up small investments.

Compounding is a long-term investment strategy.

To better understand all this let’s take an example:

          If we suppose that Rs.10,000 is held in an account that pays 5%

    interest annually. After the first year or compounding period, the total in the account has risen to Rs.10,500, a simple reflection of Rs.500 in interest being added to the Rs. 10,000 principal. In year two, the account realizes 5% growth on both the original principal and the Rs.500 of first-year interest, resulting in a second-year gain of Rs.525 and a balance of Rs.11,025. After 10 years, assuming no withdrawals and a steady 5% interest rate, the account would grow to Rs.16,288.95.

    Now let’s say you wanna know or calculate your compound interest how will you do that, let’s see down below

How Compounding Works

Compounding is not that difficult to understand as it seems to be. In simple terms with compound interest, the first year’s interest is added to the principal. For the second year, the principal, which is now earning, interest is higher. The principal will be more the next year, and so on. Thus, each succeeding year’s interest will be correspondingly greater than in past years.

Hence, if you have invested Rs 1 lakh today in an investment growing 10% annually compounded, after 20 years, the investment would be worth as much as Rs 6.73 lakh

Best ways to utilize the Power of Compounding

01

Start Early. Longer the investment, the better

The earlier & longer

you invest, the magic of compounding will work in your favor and grow your wealth.

By saving early, you will be able to gather a much bigger

retirement entity.

02 

Invest Wisely - Look for High return Investment products. A small difference in interest rate can make a huge difference in returns over the long term so always invest wisely after analyzing the product in which you are gonna invest. 

03 Grow your investment and Invest regularly - If you invest a higher amount, you will have a bigger entity at the end of the investment. Growing you investment and investing regularly will help you to take advantage of the changes in the equity market.  Once the Great Albert Eintein described the Power of Compounding as the "Most Powerful Force in the World" Benjamin Franklin one of the founding fathers of The United States of America who himself can be seen on the Dollar bills himself quote the statement "A penny saved is a penny earned"