There are two ways you can make MORE money:
- You either work for it
- You get your money to work for you
For the second option, you need to start investing. And now with so many investment options, you won’t even need a huge AF balance you can invest an amount as low as Rs. 500.
With the magic of compounding:
Just how Cinderella’s fairy godmother turned mice into horses, and a pumpkin into a carriage think of compounding as the fairy godmother for your money. Compounding can get you your dream house, your dream car or even that dream vacay to the Bahamas. All you need to do is save some small amounts of cash every month.
This is how compounding works:
- I put Rs. 10,000 in an investment that gives 10% interest every year. At the end of the year, I’ll get Rs. 1,000 as interest.
- But I decided to re-invest that interest. So now my initial investment amount becomes Rs. 11,000. (Rs. 10,000 + Rs. 1,000).
- Now the next year I’ll get 10% interest on Rs. 11,000 instead of Rs. 10,000. So I’ll get Rs. 1,100 as interest.
- Again I decide to reinvest this Rs. 1,100. So now my initial amount will become Rs. 12,100 (Rs. 10000 + Rs. 1000 interest + Rs. 1100 interest).
- Now I’ll get 10% interest on Rs. 12,100.
After 5 years my investment of Rs. 10000 will grow to Rs. 16,105 without me doing anything. So compounding in financial terms simply means the interest earned is added to the original amount and interest is calculated afresh on this amount.
This was just a small example imagine if you’d invest a huge amount, the amount it can grow to would surprise you.
Example: Tina invested Rs. 30,000 in her 20’s at 10% interest compounded per year, when she turned 40 she got Rs. 2,01,825.00. But Sara invested Rs. 30,000 in her 30’s at 10% interest compounded per year, when she turned 40 she got only Rs. 77,812.
The sooner you start the better. It all depends on the time period, the initial amount invested and of course rate of interest. The concept of compounding can be applied to any investment options: Bank deposits, mutual funds, and even stocks!
The rate of return will vary in all these: For example, bank deposits give somewhere between 6%-8% annually, Mutual Funds would give 12%-15% and shares can give 15%-20%. With increasing rates the risk also increases. But if you want to be extra safe then wait a few years for reaching your goals.
Compounding is proof that investing actually can make a HUGE difference. If you understood all about compounding, give a thumbs up in the comments section below!