The Power of CompoundingThe Power of Compounding
Today I would like to share with you one of the interesting and heart breaking
fact of investing. I am in financial Industry from quite a long time, and I have
some good number of quality clients and their big accounts. When I met all
these clients for the first time I shared with them the power of compounding.
They were surprised and not ready to believe it at all, reason was the numbers.
Now I will give you the same example, let me see whether you believe it
If you start investing 20000 every year for the next 20 years, you will get 44,
80,511 at the end of 20th year, if your money gets compounded at the rate of
20% every year. The total investment is just 4 lac, but it has become 11 times
of what you invested.
Now tell me, Can you believe me?
Yes, little difficult but you have to, because this is the fact. You will get the clear
idea if you go through the following illustration.
The above illustration supports my example and now you have to agree with me.
Year Investment Fund Value Returns Fund Value at End
1 20000 20000 4000 24000
2 20000 44000 8800 52800
3 20000 72800 14560 87360
4 20000 107360 2147 128832
5 20000 148832 29766.4 178598.4
6 20000 198598.4 39719.68 238318.08
7 20000 258318.08 51663.616 309981.696
8 20000 329981.696 65996.3392 395978.0352
9 20000 415978.0352 83195.60704 499173.6422
10 20000 519173.6422 103834.7284 623008.3707
11 20000 643008.3707 128601.6741 771610.0448
12 20000 791610.0448 158322.009 949932.0538
13 20000 969932.0538 193986.4108 1163918.465
14 20000 1183918.465 236783.6929 1420702.157
15 20000 1440702.157 288140.4315 1728842.589
16 20000 1748842.589 349768.5178 2098611.107
17 20000 2118611.107 423722.2213 2542333.328
18 20000 2562333.328 512466.6656 3074799.994
19 20000 3094799.994 618959.9987 3713759.992
20 20000 3733759.992 746751.9985 4480511.991
Investing – Make it a Habit:
Investing is not a one time job, it is a continuous process and it requires your
regular participation, contribution and review. You can't assume anything in
investing, because investing is one such job where assumptions, predictions
won't work. Therefore the only solution to become successful in investing is to
become regular. The regularity in investing, tracking, evaluating and assessing
the performance of different investments will help you to take the better
decisions, which yields you better returns.
Regularity doesn't mean spend whole day for investing, it needs hardly 30
minutes to 1hour of your precious time. Of course, when you are spending whole
day for earning some money, you have to spend at least 30 minutes to 1hour for
the better management of your money. Even there are some wealth
management firms and companies, who extend advisory and portfolio
management services which really lessen your job a lot.
Regularity in investment is very important, because the market up and downs
(volatile nature) makes it very difficult to time the market. Nowadays, you can't
even think of choosing the right time to invest.
Other factors support the power of compounding:
You must be very careful while choosing the investment tools and even when
assessing the performance of the same. You can become a successful investor
by keeping the track of your investments and the market regularly.
The Keys of Compounding:
I would like to conclude this with; the compounding power of your investments
is completely based on these 3 factors:
1. How much money you invest
2. How much time it spends growing
3. Its rate of growth
It's likely that the above example doesn't reflect how you will actually do. You
might start investing sooner or later. You might invest 10000 each year in your
first two years, 30000 per year in later years, and more as you're able to. You
might earn an average return of 15% over many decades, or perhaps your
return will be 10% or 20%. You can't control every variable, but to a great
degree, you can control how much you invest, how you invest, and how long you
let your money grow.
One of the most important factors here is time, it's one thing that you always
have to calculate, because you can invest more and expect better returns as
well, but you can't decide the time. You don't have to start investing today, or
even this year. (And in fact, you shouldn't begin investing until you've got more
knowledge under your belt.) But if you learn a few things now and get started
soon, you can set yourself up to enjoy comfort and security for most of your life.
Remember also that you can still enjoy your life while you're saving and
investing. You can amass great wealth by regularly investing a portion of your
income -- not all of it.
You can do it:
If you ever begin to doubt whether all this investing stuff is for you, remember
• You need a brain to do this -- and you have a brain.
• You need time to do this, and you have time, too.
• You won't have to sacrifice fun.
• You won't have to save and invest every penny.
• You won't have to spend hours and hours on investing every day, week or
• You can take a small amount of money and make it a bigger amount in just a
Try experimenting with compounding. You can do it the old-fashioned way, with
paper and pencil, or the less old-fashioned way, with a calculator. You just start
investing some money regularly that will be your spoon to taste the power of