Forget about the Great Pyramid of Giza, Hanging Gardens of Babylon or Taj Mahal; they don’t even come close to the eighth wonder of the world! Yes, we are talking about the eighth wonder of the world— Compound Interest. But don’t take our words, read this quote of Albert Einstein, German-born theoretical physics, “Compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t pays it.”
With the help of compound interest, you can grow your wealth. Compound interest is the interest that you get from the principal amount as well as returns from your previous interests. It means the interest is added to the principal amount at regular intervals of time. Then the subsequent interest is calculated on the total amount. Thus, over a period, these amounts will add up to a huge corpus. It means, the longer you stay invested, the bigger the fund becomes. Undoubtedly, time is the important component behind compounding your wealth.
The compounding power works on three different aspects— how much you invest, for how long you invest and the total returns you get.
Compounding does wonders over the long period
Compounding is like wine; it becomes better with time. Wealth can’t be accumulated overnight. Like a plant, it requires being nurtured. Compounding teaches you that it doesn’t need too much of money to build a huge corpus. What you require are discipline, regular saving and enough time. For instance, if you save Rs 5000/month, it will grow to Rs 64,90,906 at the interest rate of 10% after 25 years.
However, if you save the similar amount at the same interest rate for 20 years, the fund will be around Rs 37,80,150. In other words, early savings can generate a good corpus after retirement.
This is what Napoleon Hill meant when he said, “Make your money work so hard for you; so that you do not have to work for it.”
Role of interest rate
It is no brainer to judge that higher the interest rate, higher will be returns. Here, interest rates play an important role. Let’s understand it with an example. Assume you keep Rs 10,000/month in the instrument offering 10% interest. After 25 years, you will get Rs 1,29,81,812. On the other hand, if you invest for 23 years in an instrument offering 12% return, the final amount would be Rs 1,40,58,629. In the second option, the investment is made for a lesser duration, but the final amount is more due to high-interest rate. Now you can see the magic of interest rate.
How to calculate compound interest online?
You can use ICICI Prudential’s Power of Compounding Calculator to know the growth of your money in a long run.
Source: ICICI Prudential
Where to invest?
To reap the benefits of the power of compounding, it is important to choose right investment avenues on the basis of one’s risk appetite. For instance, equity is risky and therefore, should not be selected if you are near to your retirement age. Similarly, to build a huge corpus, it is advised to invest in a good wealth plan that offers the perfect mix of equity and debt. By choosing right investment products, you can earn high returns. For instance, ICICI Pru Wealth Builder II with a life cover of Rs 15,00,000 and at a premium of Rs 1 lakh/year for the period of 25 years, will give Rs 64,67,783 to a 32-year old male, assuming 8% interest rate.
Compounding works only if you let your investments to grow. At first, results will not be so powerful but as they say, ‘slow and steady wins the race,’ you will surely create wealth. Like in a story of hare and tortoise, the hare started the journey but left it midway. However, tortoise kept going and never looked back.
So start early and invest regularly. Let Einstein’s 8th wonder of the world do its work for you!