Power of Compounding
According to Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Let' s delve into what exactly Compounding Power is and how you may use it to your advantage in your investing. By definition, Compounding is a method of calculating total interest on a principal amount. Earned interest is reinvested as the principal amount on which additional interest is then earned. This results in exponential growth rather than linear growth.
To illustrate, imagine you won a competition, and you must choose between two prizes – an immediate cash reward of Rs 5 Cr or a magic box that has Rs 1 but doubles it every day for a month. Which one would you pick?
Now, if you’re like most people, you’re probably tempted to get on the Rs 5 Cr train. But if you pull out your calculator and double Rs 1 each day, for 30 days, you will realize that by the end of the month, you will have more than Rs50 Cr!
Now this is the true power of compounding and to enjoy it, you don' t need more knowledge, you just need a plan of action:
Begin early:
Even if your first investment is small, you must start investing the day you begin earning. The earlier you start, the more time you give your investment to grow. It may seem slow during the initial few years, but the small initial amount will soon become a handsome pile of cash.
Discipline:
There is nothing more important than discipline.To have a healthy investment portfolio, you must set financial goals and stick to them.No matter how much money you make, it' s essential that you set aside a set amount each month or year to invest. Discipline is what will help you achieve long-term financial goals.
Value of Time:
The true power of compounding is seen with time. The more time you give your investment, the more it grows. This is why one should always invest long-term and let your money grow exponentially.
The Power of Compounding works best when you follow all 3 points listed above. So start investing early, invest regularly and don’t take money out unless you really need to. Enjoy the power of compounding and your money work for you!
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