Albert Einstein called compound interest “the 8th wonder of the world” and considered it to be the biggest mathematical discovery ever.
Compounding is a process where you earn interest which is added back to the principal investment amount so even that interest amount starts accruing further interest.
Let’s consider an example of two friends Ram & Rahil.
Ram & Rahil start a job after their post graduate degrees. Ram decides to save money & begin investments at the age of 25 years of age. Rahil feels the need to spend now and consider investing options at a later date.
Ram made a conscious decision to invest 10,000 every month and started earning an interest of 10% per annum. His savings compounded each month.
Rahil took a decision of investing only after 10 years of active career. He started investing and financial planning at the age of 35 years of age. He too started an investment discipline of 10,000 per month.
Now let’s move time 30 years ahead from today when Ram & Rahil are both 65 years of age. They practiced a strict regime of investing 10,000 per month with an interest of 10% per annum on their savings/investments.
Rahil invested 12,00,000 lesser than Ram as he started investing 10 years later. This has led to huge difference in the final amount each one received. Ram received a receipt of 6.30 crores and Rahil received an amount of 2.25 crores. A difference of 4 crores.
The power of compounding helped Ram earn 4 times more wealth than Rahil.
In the initial years of investing, the difference in earning is quite small. But as the investment period grows the differences in growth of accumulated earnings is exponential. Truly, power of compounding is indeed an 8th wonder of the world.
Happy Compounding !!!
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