Did you know that Compounding is called the 8th wonder of the world! The beauty of the idea is in understanding the concept.
Warren Buffett believes in compound interest's power and has been since the start of his investing career. A lot of people say that compound interest has been the secret to his enormous wealth. He reinvests the investment gains back into his investments and continues to do so year after year.
If you try to understand it, it is simply an interest on interest. If you want to know about it in detail, you can check out about Compound Interest on Wikipedia.
If you know this principle, it can help you make or break your life's finances. Why do I say that?
Because, if you use it to your benefit, for example, if you save money and invest it in an instrument that can give you returns based on the principle of Compounding. You can save a huge amount, that would be a lot more than you could imagine. And if you are on the other side, for example, if you are paying credit card debt and taking more EMI's, that can be detrimental to your finances.
Please allow me to show you the power of this principle if you use it in investing.
Some of the investment experts believe that it is a great idea to invest in an index fund. An index fund comprises a specific number of top companies in that country. The benefit of an index fund is that the risk is much lower than that of other mutual funds or stocks. Since, even if a particular company goes down, it will be removed from the fund, and the next company in top rankings would replace it in the fund.
For example, if I talk about the S&P 500 Index, which is of the American stock market. It is said to have given compounded annual returns of 10%+ for investments done over the long term (Source).
So, the investment can turn out to be huge if you would be doing a SIP (Systematic Investment Plan) each month.
Let's say If I have no money right now to invest as the principal amount. I invest $500 each month for ten years, so the total capital invested by me is 500 * 12 * 10 = $60,000
And If I would have invested it in a fund which gives me a compound interest of 10% per year.
My money would have become $102,422, which is huge!
I used a Compound Interest Calculator by Pigly, which is available online for free. The site is pretty cool. They have a lot of different calculators available. All of them are free to use! Once I enter the details, it shows me different results based on how much I could have earned if I had invested Quarterly, semi-annually, or annually! You can check it out.
I hope you get the idea of how awesome it can be to know the power of Compounding and How you can use it to grow your riches! I sometimes wonder – It would have been so much better if I knew about this principle before, so I could have started investing earlier. You see, the longer you are investing with compound interest, the higher your returns are!
It would have been so awesome if I had stumbled upon any such article earlier in my life. You can help your friends find out about the power of investing with compound interest, Please share this article, and help them out!