The Power of Compounding || Investment Lesson

Talking about the compounding without considering the most powerful statement by Albert Einstein would be an injustice to the compounding itself. According to him, “Compound interest is the 8th wonder of the world. He who understands it earns it; he who doesn’t pay it.” 

Now imagine if such a great personality has considered the compounding or the compound interest that valuable then how important compounding in our life really is. Considering compound interest as the eighth wonder of the world depicts the value of compound interest. 

Compound interest has the efficiency to make you financially independent and help you live your dream life so how can we ignore the power of compound interest.

Compound interest is simply the add on of the interests over the deposits or the loans.

When an investment is left for years, it keeps on increasing its value by the addition of the interests over the deposited amount and the interest already given.

Magic of Compound Interest;

Let's understand this by an example;

Suppose A and B started investment by investing 100 rupees per year. 'A' invested in some bank and the bank provided him a simple interest of 10% annually. On the other hand, 'B' was aware of compounding and he invested 100 rupees in Equity, where he got a compound interest of 10% annually. Now, after one year, both of them will get an interest of ten rupees and both will be having a total amount of 110 rupees. 

Again one year later, 'A' will get an interest of 10% over his invested money of hundred rupees, which means after two years of his investment, 'A' is now having 100(first investment) + 100(second investment) + 10(interest by the first year) + 10(interest by the 2nd year)… Now after investing for two years, A will be having 220 rupees. He got an interest but the interest was 10% Simple interest, which was on the money he invested.

Now, let's talk about the investment of 'B'. As 'B' was smart enough, he invested in the compounding field. Now, after two years, B will be having 221 rupees. One rupee more, do you know why? Because of compounding. B got 10% interest by the end of 1st year i.e 10 rupees on investment of 100 rupees. Now after another year, he got interest of 10% on rupees 110, which includes his initial investment plus the interest money. As a result, he got one rupee more than 'A'.

Now, you may think what will this one rupee difference do. Wait a second pal, everything takes time and the whole process of compounding is based upon time. Now if you will keep on investing for a longer time, say 35 or 40 years, you will end up creating something that is too big to imagine.

By simple investments of 100 or 1000 rupees per month, you can end up creating crores after 30-40 years. This is the power of compounding.

India and Financial Education;

I know, a number of people in India are considered intelligent only because of their marks card, the majority of people are considered successful only if they are earning a six-figure salary.

We Indians mostly grew up in a middle-class background, where right from childhood, we are told to score good, get a good job, a car, etc and then you're considered successful as well as financially stable. Maybe for our older generation, this would be financial freedom but in today's world, financial freedom is something, where you let your money work for you and you keep on enjoying life. And to achieve this kind of financial freedom, you need to know about the power of compounding and investment.

In the words of Robert Kiyosaki, "In the real world outside of academics, something more than just grades is required. I have heard it called "guts," "chutzpah," "balls,""audacity," "bravado," "cunning," "daring," "tenacity" and"brilliance." This factor, whatever it is labeled, ultimately decide one's future much more than school grades.”

Books I suggest;

I personally recommend you to read "The Intelligent Investor" by Benjamin Graham, if you want to learn about investments and "Rich Dad Poor Dad" if you want to learn about financial freedom.

Apart from these, you can also read books like "Richest Man in Babylon", "Think and Grow Rich", etc.

My Opinion:

It won't be wrong if I say we are too illiterate in terms of financial education. The majority of us are earning huge amounts of salaries but when it comes to financial stability even big salary holders are under credits and are financially completely unstable. I am not talking about one or two persons or a group of persons, instead, I'm considering the majority, because a majority of us end up with the same. So, don't you think there is a big bubble that is not letting us be financially stable? Hence, there is a great need for financial education to be financially stable, and also, one way or the other, it'd help the economy of our country to grow as well. At last, just a small message from my side, Start Investing and try to understand the magic of Compounding.