Compounding investment earnings is what can make even small investments become larger, given enough time. You are probably already familiar with the principle of compounding. The money you put into a bank account earns an interest. Then, you earn interest on the money you originally put in, plus on the interest you have accumulated. As the size of your account grows, you earn interest on a bigger and bigger pool of money.
The following table shows how much your money would grow when you invest a fixed amount per month over a period of 10, 15, 20, 25, and 30 years, assuming an interest rate of 10% p.a.
| Amount (Rs) | |||||
|---|---|---|---|---|---|
| Years | 1000 | 2000 | 3000 | 4000 | 5000 |
| 5 | 78,082 | 156,165 | 234,247 | 312,330 | 390,412 |
| 10 | 206,552 | 413,104 | 619,656 | 826,208 | 1,032,760 |
| 15 | 417,924 | 835,849 | 1,253,773 | 1,671,697 | 2,089,621 |
| 20 | 765,697 | 1,531,394 | 2,297,091 | 3,062,788 | 3,828,485 |
| 25 | 1,337,890 | 2,675,781 | 4,013,671 | 5,351,561 | 6,689,452 |
| 30 | 2,279,325 | 4,558,651 | 6,837,976 | 9,117,301 | 11,396,627 |
Here's how much your money would grow if you make a lump sum (one-time) investment and leave it untouched. The interest rate has been assumed to be 10%.
| Amount (Rs) | |||||
|---|---|---|---|---|---|
| Years | 100000 | 200000 | 300000 | 400000 | 500000 |
| 5 | 161,051 | 322,102 | 483,153 | 644,204 | 805,255 |
| 10 | 259,374 | 518,748 | 778,123 | 1,037,497 | 1,296,871 |
| 15 | 417,725 | 835,450 | 1,253,174 | 1,670,899 | 2,088,624 |
| 20 | 672,750 | 1,345,500 | 2,018,250 | 2,691,000 | 3,363,750 |
| 25 | 1,083,471 | 2,166,941 | 3,250,412 | 4,333,882 | 5,417,353 |
| 30 | 1,744,940 | 3,489,880 | 5,234,821 | 6,979,761 | 8,724,701 |
The real power of compounding comes with time. The earlier you start saving, the more your money can work for you. To attain certain amount of corpus within a set period of time, a pro-active investment style is preferable. Thus, no matter how young you are, the sooner you begin saving for the future, the better it is.
Long time ago there was a King in India who loved to play games. He soon grew bored of all the games played at that time and wanted a new game that was challenging. He commissioned a poor mathematician who lived in his kingdom to come up with a new game. The mathematician invented the game of chess. When he showed it to the king, the ruler was so pleased that he gave the inventor the right to name his prize for the invention. The man, who was very wise, asked the king: "Your highness, if you place just one grain of rice on the first square of this chess board, and double it for every square, I will consider myself well rewarded." "Are you sure?" asked the king, greatly surprised. "Just grains of rice, not gold?" "Yes, your highness" affirmed the humble man. "So it shall be" ordered the king, and his courtiers started placing the grain on the chess board. One grain on the first square, 2 on the second, 4 on the third, 8 on the fourth and so on. By the time they came to the 10th square they had to place 512 grains of rice. The number swelled to 5, 24,288 grains on the 20th square. When they came to the half way mark, the 32nd square, the grain count was 214, 74, and 83,648- that is over 214 crores! Soon the count increased to lakhs of crores and eventually the hapless king had to hand over his entire kingdom to the clever mathematician. And it all began with just one grain of rice!
Moral of the story:Never underestimate the power of compounding. It is rightly called as the 8th wonder of the world. Small amount of money invested every month from the beginning of your work-life can lead to millions at the time of your retirement.
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