We have so many books dedicated to discussing the “Seven Wonders of the World”. Hardly, any of them reiterates the beauty of “Compound Interest” that the much-acclaimed Albert Einstein had described as the “Eighth Wonder of the World”. The magic of compounding that has helped many get rich is evident from the experiences of people who shared how they earned considerable returns and amassed a corpus simply by investing continuously and staying invested for more than a decade.
Personal finance experts call for “starting early” and “patient investing” to benefit from the compounding effect. The “Magic of Compounding” works wonders for those willing to give time for their money to earn returns that would then be reinvested to earn further returns.
Accelerating growth through compounding
Quite rightly said that compounding helps accelerate the growth of your investments. You leave your wealth to grow constantly over a period, thus, bringing you closer to your financial goals. However, for this to happen, you must start investing early, which means that you must plan your investments as soon as you receive your first paycheque. You may choose to invest in a lump sum, thus, leaving your investments to both time and the market cycles to swell in size and volume. Alternatively, you may invest through systematic investment plans (SIPs) regularly to benefit from the gradual investing process. Time and patience together work wonders as your investments get turned into wealth after a prolonged period.
Explaining how compounding works
Let us assume that the market in which you invest earns 12 per cent returns every year. Though you may have an assortment of investments that earn more, let us presume this returns rate for the time being. Say that you invest ₹5000 every month, which means that you have put in a monthly SIP of ₹5000. Realizing how long-term investments can help you to grow your money, you may continue investing for the next 10-15 years.
SIP Amount (in Rs) | Interest Rate (in %) | Investment Tenure (in years) | Principal Amount (in Rs) | Interest Earned (in Rs) | Maturity Amount (in Rs) |
| 5000 | 12 | 10 | 605000 | 573197 | 1178197 |
| 5000 | 12 | 11 | 665000 | 726669 | 1391669 |
| 5000 | 12 | 12 | 725000 | 907214 | 1632214 |
| 5000 | 12 | 13 | 785000 | 1118266 | 1903266 |
| 5000 | 12 | 14 | 845000 | 1363695 | 2208695 |
| 5000 | 12 | 15 | 905000 | 1647859 | 2552859 |
Discipline is the key
To build wealth through regular SIPs, you must continue to make disciplined investments over the period. Continued investments help you gain from the averaging effect as you invest regularly during both high and low points in the market, thus, lowering market-related risk during the investment period. Apart, averaging out over a long tenure eliminates the need to time the market. The stress associated with investing is also low as a fixed amount is deducted from your earnings on a particular date, thus, relieving you of the strain of having to remember your investments and put in your money accordingly.
Compounding is an effective tool to grow money. However, for this tool to show its effect, you must be willing to put in your time, earnings and patience too.
