Behavioral InvestmentInvestment

Compound Interest Power

In my last article, I mentioned 7 worst money mistakes one can make in his 20s and the most important point out of those 7 listed ones was Neglecting or Delaying Investment. You might think that you are young and you need not to start investment right now or you can delay it by 5 years as investment means saving for retirement.

You are wrong!!!

No matter what your age, now is the time to begin saving for retirement.

You might focus your initial period of adulthood in getting better job and earning more money but remember that there are only 2 things which make difference in rich and poor and they are:

1.) Rich spend less than they earn

2.) Rich save money as much as he can and invest the same in high return products.

Many people in young age completely neglect the power of saving and then investing it. Even if some save, they keep the money in bank only or do FD. Probably they think its the best they can do with their money. Today I will show you how your small investment can be turned into great value by the power of compound interest.

The Power of Compounding:

One simple truth about compounding is that it takes time. Its only depends on time, the more time you will give to it, more powerful it becomes.

The miracle of compound interest is the secret to getting rich slowly.

I am not sure what people think but when I tell them that in equity then can earn 15% compound interest then they say ”bus itna sa hi” (It’s so low). Then I ask them that how much they earn from their FD and sometimes they are not aware about that also. But they believe FD or RD  is the best investment they can make and they neglect the pure gold mine for getting better return.

Now lets see how different kind of investments turn into different value.

The Growth of Single Rs. 5000 Contribution:

For example, 20 year old Pooja makes a one time Rs. 5000 contribution towards investment whether in share market or mutual fund and she never touched this money again ever till her retirement. So, let see how much this money will be worth after 40 years i.e., at 60 year of age.

Compounding return on one time investment

You can see how the money has earned more and more value by the time.  One can see if you delay your investment then you are making fool of yourself.

Growth of Annual Rs. 5000 contribution:

Compounding gets power if you regularly invest in it. Lets take an example that Pooja decides to invest Rs. 5000 annually:

Regular investment of Rs. 5000

Compounding can be made even more powerful through regular investments. It is great that a single Rs. 5,000  contribution can grow to more than Rs. 1,540,000 in 40 years, but it is even more exciting to see what can happen when Pooja makes saving a habit. If she were to contribute Rs. 5,000 annually for 40 years, and if she left the money to earn an average 15 percent return, her retirement savings would grow to more than Rs. 1 Crore, as you can see from the above chart.

This is the extraordinary power of compound interest.

Cost of waiting one year:

Its in the human nature to delay the investment, usually people say “I can start saving next year” or “I don’t have time for Investment” or “I will do it later”. But do you realize the cost of delaying your investment by even one year is also enormous.

Even one year makes a difference in Investment.

One can see from the below chart if Pooja waits for one year for her single investment then how much it will cost her. It will cost her more than Rs. 2 lakh.

Cost of delaying investment by one year in case of regular investment

Likewise many people, she might also think that she will lose 1st year return but its not like that. She is actually losing the last year’s return not the first one. This is a big price to pay for the excuses which one makes.

As you have seen the value of investment increases much faster in regular investment; if one delays investment in this case than the lost of wealth is also huge. In this case the loss will be more than Rs. 13.5 Lakh. That is probably more than her annual income.

Cost of delaying investment by one year in case of regular investment

How to get rich slowly by compound interest:

If you want to get rich with the help of compound interest then please follow below 3 simple steps:

1.) Start Early: The early you start the more time compounding get to work in your favor and more wealth you can have.

The next best thing to starting early is starting now.

2.) Regular Investment: Make your plan and start investing regularly, be disciplined. Try to give utmost priority to this.

3.) Be Patient: Never ever touch this money for personal use. Compounding works only if you allow it to grow. In the starting result seems to be slow but it will show you results in longer period of time.

Compounding creates a snowball of money.

If you have something to add, Please post your thoughts in comments. I would love to hear from you.

Happy Investing!!

Vikas Agarwal
the authorVikas Agarwal
Vikas Agarwal is an IIT-Varanasi graduate in Chemical Engineering. He is the Founder and CEO of Finaacle.com - an investment advisory website. He is a Business Development Professional but a Value Investor at heart. He writes articles on Finaacle, which focus on simplifying the art of investing and the causes of human misjudgment when it comes to investing. He also shares his experiences as an investor and lessons from some of the greatest investors of all time.

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