The Magic called Compound Interest

Albert Einstein, in his lifetime, frequently said, “Compound interest is the eighth wonder of the world. The power of compound interest is the most powerful force in the universe.” Even by investing as little as a few thousand rupees per month, you can still become a millionaire using the magic of compounding. There are usually three factors that determine your magic of compounding. So, the three important factors are- (i) how much you invest and how regularly, (ii) your growth rate and (iii) how long you let your money grow.

Suppose, you have a compounding interest of 10% annually starting with an initial capital of just five thousand rupees. Now, lets take the first factor into consideration, i.e., how much you invest. If we calculate, it takes you about 7 years to double up your money, thanks to the magic of compounding. You will notice that the amount compounded every time is gradually increasing. Hence, at the end of the tenth year, your initial capital of five thousand rupees will have become close to thirteen thousand rupees. This is just based on the sum of five thousand rupees that was invested without you adding any more funds or doing anything at all. If you want to hit a million rupees, you can make adjustments like investing more than five thousand rupees as your initial capital or investing annually to increase that principal amount.

Let’s take the second factor into consideration, i.e., your growth rate. If you are unable to invest a lot of cash, what you can do is to find ways to increase your compound rate. So, instead of 10% let us increase the growth rate to 15%. After increasing the growth rate, you will notice that it takes only about five years to double up your money. By the tenth year, you would have quadrupled your initial capital.

Let’s go to our third factor, i.e., how long you let your money grow. The longer you hold, the more compounding magic will work for you. In fact, this is the key ingredient of compounding magic. It can be calculated that based on the 15% growth rate and the initial capital of just five thousand rupees, you will hit the balance of the first million rupees in 38 years, while it would take only 12 more years (i.e. 50 years from the start) for you to have made a sum of more than 5 million rupees! It will be very hard for compound magic to take effect if your investments were on a short-term basis. As the saying goes, “Time is gold.”

Obviously, if you want to turbo charge your return on investment, you can do so by putting all 3 factors into play, i.e., by combining the amount of the funds, growth rate and the time period for which the compounding takes place.

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