Power of compounding
Power of compounding
“Compound interest is the eighth wonder of the world” – Benjamin Franklin
Or
“Compound interest is the world’s greatest discovery” – Albert Einstein
If the person earn Rs. 20,000 per month, after how many years he will have 1 crore? It will take almost 50 years.
If you invest Rs. 20,000 every month for 50 years under same term and condition you will get more than Rs.173 crore.
This is called “Power of compounding”. The basic prefaces of investing are that your money gets multiplied many times termed as “Power of Compounding”.
Compounding of money is the way to earn interest on invested money. That money of interest will not remain stored in one place. Again interest will be calculated on that money of interest. And same procedure repeats itself. This compounding makes the money honey.
How investors represent the Power of compounding?
Three students Mr. Realist Ms. Thrifty, and Ms. Follower were studying in the same school and the same class.
Ms Thrifty have her tenth birthday and her father gave Rs100. Rather than spending them she invest with 15% of interest every year.
When Mr. Realist was 16 years old he won the cash prize of Rs. 200.
Ms Thrifty was his friend and suggest investing that amount of prize in same way as she have invested.
Ms. Follower received her first salary and she also invests the money in the same investment.
They aged about 60 years and decide to take out the money from their respective investments. Whose withdrawal will be highest?
Ms Follower will earn the highest than Ms thrifty. After how many years Ms Follower has invested is not the issue but she invests four times more than Ms Thrifty. She received interest of 40 years.
Now, Calculate the total amount of final withdrawals of both. Though, Ms Thrifty had invested only Rs. 100 but finally received Rs. 1, 08,366. While follower who invest Rs.400 will receive Rs. 93,169!
The above example mentions that longer your investment more you earn finally.
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