When you enter the world of investing it is overwhelming. You’ve started building your savings, but now what? How can you “make your money multiply”? It almost feels like everyone who makes it look easy and fruitful is keeping some kind of magical secret from you.
Well, guess what? They are!
We’ve got the inside scoop on this secret – a wonder called compounding.
Albert Einstein once said, “Compound interest is the world’s eighth wonder. He who understands it earns it… he who doesn’t… pays it.” To ensure that you’re on the earning end, and not the paying end, of the equation, here’s everything you need to know about compounding.
WHAT IS COMPOUNDING?
The definition of compound interest (also known as compounding interest): It’s the interest on a loan, investment, or deposit calculated on the basis of both – the initial principal amount and the accumulated interest from previous periods.
The definition of compound interest for the investment newbie (yes, you) – Compound interest is the interest you earn on your interest.
Still a bit confused? An example might help.
Let’s assume you’re investing ₹100 at 10% interest per year.
That makes the ₹100 your principal amount aka your initial investment amount. So 10% interest on this principal amount would mean that at the end of year 01, you will have yourself ₹110.
With compounding in the picture, your principal amount for year 02 will be ₹110 and not ₹100. This means that at the end of year 02 you will earn 10% returns on ₹110 rather than ₹100 and you will have yourself ₹121!
And so forth.
Take a look at the table below to see how your ₹100 will grow over a period of 10 years with 10% interest per year:
We at the Deciml App are ardent believers in the power of compounding, and we would be remiss if we didn’t reiterate just how lucrative it can be. We want you to start now and experience first-hand, the benefits of compounding. Don’t think any amount is too small – micro-investments are extremely useful when equipped with the power of compounding. We understand that it is difficult to make lump sum investments as soon as you start earning. But, even investing ₹10 everyday for a 30 day period with the Deciml App, sets you up with a healthy ₹300 investment (which will now grow through compounding) for the month! How cool is that?
UNLOCKING THE POWER OF COMPOUNDING
There are three important things to remember if you are investing in instruments that offer a compounding interest structure of returns.
1. Track Your Expenses – The more you invest, the more you can earn on your investments with compound interests. And how can you maximize your investment amounts? By making sure you have enough money to put into your savings and redirect toward your investments. So, don’t be careless with how you spend your hard-earned money.
2. Stay consistently invested – Be disciplined with your investing practices. Whatever amount you might allocate to monthly investments, be sure to diligently invest that amount. There’s no room for that super expensive bag or a brand new watch if it is eating into your investments. Secondly, be patient with investments that are compounding in nature. If you are looking for quick returns, compounding isn’t for you! But, if you can see the value in making small investments over a period of time diligently, you will be sure to reap the benefits in the long term.
3. Start Early – If we’ve said it once, we’ve said it a thousand times (and we will still say it again!) – START EARLY! As soon as you have an income, you need to get on the compounding bandwagon. Identify investment opportunities that align with your personal financial goals, and start making good use of your savings now.
On that note, we will say this – compounding is only a secret because so few of us know how it works, or how it benefits us. But the cat’s out of the bag now. Now you know all about compounding and its (not so) secret power – it’s time to put that knowledge to use and start reaping the benefits of compounding now!