Doubling your Money
Have you observed that if you start early and study regularly you will score good marks in your final exams? The parallel universal truth to that is if you start saving early, you will be rich and wealthy. But before you understand the power of compounding, let’s see what role interest plays in the power of compounding.
What is interest?
Interest is a “fee” paid by the borrower to the owner of money as compensation for the usage of money. Suppose you have Rs.10,000 and you don’t need this money immediately, you can go to a bank and place this money in a Fixed Deposit (FD). The bank will pay you a fixed percentage of return on the money you have given it at the end of the year. This is known as interest.
What is the power of compounding?
When you get interest on an interest amount, it is known as compounding interest. Imagine you get 10% interest per year on your saving of Rs.10,000 is Rs.1000. Now due to compounding interest, the next year you will earn interest on Rs.11,000 (1000 + interest of 1000) and you will now have Rs.12,100 and so on. Thus, in approximately seven years, your amount will be double. So in the years to come, you will see the multiple growths of your money saved today.
The power of compounding works wonders over a longer period of time. So if you set aside Rs.500 every month from the age of 15 at an interest rate of 10%, by the time you are 50 years old, this will grow to approximately 20 lakhs.
Let’s understand this with an example of two friends Robby and Ronnie. Both started working at the age of 25 years. Robby starts saving immediately and he invested Rs.50,000 every year at an interest rate of 10% for the next 10 years and then he stopped savings. When he turned 60 he had accumulated an amount close to Rs. 95 lakhs.
Ronnie believed in enjoying life and he saves nothing till the age of 35. Thereafter he realized the need to save and started saving Rs.50,000 at the rate of interest of 10% till he was 60. Even though he invested for 25 years, unlike Robby who invested for 35 years he only gathered Rs.54 lakhs in his account. The 10-year difference brought about a difference of Rs.41 lakhs in the final accumulated sum.
This is the power of starting early and reaping the benefits of compounding. The more you delay savings and investments, the more the amount you need to invest to get the same corpus of money in your retirement fund.
How to Start Saving?
The earlier you start investing for your future, the richer you will be. To do this you don’t need to earn huge amounts. To do this you don’t need to earn huge amounts. You can start today. Begin saving at least 10% of your pocket money and put that aside in your recurring deposit account to allow it to grow. All you need is consistency and patience. The fascinating effect of compounding builds up momentum over a period of time and becomes an avalanche of wealth.
– Jane Sha