Rupakumar Pradhan, CFPCM, CWM®

Personal Financial Advisor

Practical Views on Money, Finance & Life .....

Make The Power of Compounding Work for You

Make The Power of Compounding Work for You

Make The Power of Compounding Work for You
June 29
06:53 2017

 

Planned Investments always yields more than unplanned and haphazard investment. This is because you will be monitoring it better.

A more important factor is that it will help you take advantage of the power of compounding.

Of course, it needs no retelling that the sooner you start to invest, the more you will have at a particular age. But it’s never late to use the power of compounding to maximize your savings. And the good thing about it, is that you don’t have to constantly monitor it. As one might say, compounding happens, and you reap the benefits.

At a basic level, compounding works like this:

Suppose you invest Rs 100 at an annual rate of interest of 10 percent. Calculated on the basis of simple interest, you will gain a return of Rs. 10 at the end of one year. But, if the interest wer

e to be compounded half-yearly, your return would work out to Rs. 10.25. This is because when the interest i

s calculated for the second time, the interest in the first half of the year would have been added along with the principal for the calculation.

Yes, 25 paisa doesn’t make much of a difference, but imagine a scenario where you invest thousands over a long period, say 20 or 30 years, and the interest is compounded quarterly or half-yearly, or even annually.

Many people are still likely to think it will make a difference of may be 10 percent or 15 percent, but it will surprise them to know that it makes a difference in terms of multiples rather than percentages.

A simple and quick example should show up the power of compounding starkly.

If you start at age 20 and invest a certain sum of money for eight years, your return at the age of 60 will still be higher than if you started at age 28 and kept investing the same amount till the age of 60.

That means that an invested amount will yield more than four times itself just because of the eight-year lead. Now , that’s certainly something mull over.

So, its much more beneficial for you to start regular investments at the age of 20 rather than 30, and at age of 15 instead of 25, and at age 5 instead of 15.

In that case, compounding can serve the needs of the next generation, or one’s children, very well. And compounding can be the answer to build your retirement fund through systematic investments and without taking undue risks. And, even small amounts invested regularly can make a substantial difference to your wealth.

So, save those truant rupees and start now to use compounding to best advantage.

“Power of compounding is the eighth wonder of the world. One who understands this, earns it……. and one who does not……, pays for it.” -Albert Einstein

I am a CERTIFIED FINANCIAL PLANNERCM. For the moment, I have shared my experience growing up with you because it had a tremendous impacted on how I do what I do.

If you have a question about your own financial situation please connect with me.  I’d be delighted to try to be of service.

Don’t miss any future posts, please subscribe via email.

I am a CERTIFIED FINANCIAL PLANNERCM. For the moment, I have shared my experience growing up with you because it had a tremendous impact on how I do what I do.

If you have a question about your own financial situation please connect with me.  I’d be delighted to try to be of service.

Don’t miss any future posts, please subscribe via email.

Want to become a Crorepati with nominal Income? Read it.

About Author

Rupakumar

Rupakumar

Mr. Pradhan has over 20 years of experience in financial services industry. He was previously working with leading Life Insurance Companies, Broking Firms, Distribution Company, Financial Planning Company and Health Insurance Company. He has cleared several NCFM modules & is also AMFI Certified. His expertise is in Comprehensive Financial Planning, Technical Analysis, Portfolio Management, Investment Advisory, Wealth Management & Business Development.

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