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What everyone misses about the power of compounding


You don't want to buy any stuff for the price of two right? No one does! Albert Einstein reportedly said it once, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.”. And it couldn't be more true. That's the power of compounding! If you’re not familiar with it, it doesn't take much to understand it. Technically, compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. Still some clouds under the sun? Let’s simplify the power of compounding.

Suppose that you invest Rs.100 at a simple interest rate of 5% for 10 years. What would be the return after years? Rs.150 is what you get, a return of Rs.50. Now here comes the magic, when you opt for compound interest instead of for the same rate and period, you get a return of Rs.162.889 i.e almost Rs.163. How? Turns out, every next year's interest is the simple interest of the sum of the previous year's amount.



I know, I know! It's just a difference of Rs.13 in 10 years right? So why don't you think of the big picture here? As you might be knowing, time is the greatest factor for any investment. So, if you invest a hefty amount of money for quite some time like maybe 10-25 years, your money will grow really well, and that’s the real power of compounding. Evidently, there are only a few basic factors to consider the principle amount, time(years), and the rate of interest.



Compounding comes with perks more than you can infer. It is one of the most beautiful retirement plans one can think of or maybe a savings for future planning like college or unwanted emergencies or any grand festivities, you name it! If you start at an early age and with just the right amount of parameters you might be able to afford your college tuition on your own or maybe spend the rest of your old age at a beach house by the side of your pool with our loved ones. But you have to make the timing of it right because it is the biggest factor in all this gameplay. Discipline is also really important for it to be fruitful (not using that growing money beforehand for personal use). The best promising thing about it is it will always have a steady growth no matter what.

There is a special calculator that can tell you exactly how many years your money can double itself with given inputs. The Rule of 72! It is a really handy one when it comes to analyzing the investment you were about to make. If you divide 72 by the rate of interest, it will result in the years it will take to double your money. Interesting, isn’t it? But beware, as much as it seems promising, make sure you don't end up on the wrong side of the give or take money event.



And you know the best part yet about the power of compounding? It is really easy to understand even for kids. As a matter of fact, they teach it in junior high schools . And it's really easy to understand! Just like that! So what are your thoughts now on Compounding, if you didn't know? Amazed right? Well, we've come to the end of the article for now, but hey let's catch up for more at Cerebro kids .

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  • Author : Shubham Raj

    2020-10-06 00:00:00

    Shubham is currently pursuing a BE in IT and will graduate in 2022. Loves to learn and help others anytime anywhere. Believes in focussing on good things around.