How many of us wish that money could grow on trees? Just plant a sapling today, nurture it well with quality soil, manure and water and be ready to devour the fruits that grow on it. Some people also believe that growing money plants in their gardens will encourage lady luck to walk into their homes and shower them with pots of gold and money. These anecdotes and frequent imaginations of money growing legs and walking into your house are best left to storybooks that you can read and forget. When reality knocks at our doors, we realize that growing money relies on a prolonged and persistent approach. You cannot earn a corpus unless you are patient with your investments, which implies giving them the time to grow.
Are you aware that money could be grown by magic too? It’s not the Abracadabra propagated by illusionists, rather it is reverentially known as the “Magic of Compounding” by personal finance experts worldwide. Mathematicians look at the compounding effect in awe as this lone formula explains how you can earn money not only on your capital but also on the interest amount earned on your initial capital. Make investing a daily habit without fail, and you will realize how soon you will be counted among the richest persons in your neighbourhood, if not your country.
Decoding the Compounding effect
The much-acclaimed physicist Albert Einstein declared “Compound Interest” as the world’s eighth wonder. We must now understand how compound interest works to realize why this word receives so much credence among investors. The “Compounding Effect” initially used by psychologists as the first step to self-development and self-care is officially the most important element to wealth creation.
By compounding, we mean the ability to generate returns on our earnings that are then re-invested to earn more. This way, you invest and reinvest whatever you earn from myriad sources, be it a nine-to-five job or doing business. The fact that you generate earnings from your previous earnings and continue to do so with all subsequent earnings explains how the compounding effect can cause your money to grow exponentially.
Take, for example, you invest ₹15000 every month for 30 years non-stop in an equity mutual fund that delivers 15 per cent average returns. The total invested amount would be equivalent to ₹54 lakh. The estimated returns would be ₹9,97,47,309. The total value of the investment would be ₹10,51,47,309.
The magic of compounding has had a miraculous impact on people looking to grow rich gradually. While patience is the key, the secret sauce to the success of this magic is to continue unbridled with your investments.
So, do not just invest, but also learn to stay invested for a prolonged tenure to benefit from earning huge returns.