“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
Compounding is one of the most overlooked aspect in the field of finance. When people say you need patience to be wealthy, they mean it. Warren Buffett at the age of 90 had a net worth of 81 billion dollars. Of which, 70 billion dollars came after the age of 60. The secret here is to let the interest earn you more interest. The profits you gain, get reinvested and that further increases profit. Even if you start small-if you start early-by the time it matures, it will be plenty. This is why the pension amount is always big. Compounding is directly proportional to starting early. The earlier you start, the higher the gains. By higher gains, we mean a lot higher than you can actually anticipate!
You and your friend are 25 now. Your friend starts investing this year. You do not really believe in investments and would rather enjoy your 20s. Your friend invests 10k every month. He plans to continue his investment till he is 55.
Total amount he would’ve invested by then would be 36 Lakhs. If his investments earn him 10% annually, his total amount (invested+ gains) by the time he is 55 would be close to 2.28 Cr.
However, for you, commitments kick in by the age of 30. You feel the need to start investing and you begin investing 10k every month at the age of 30. With the same 10% annual interest rate at your age of 55, your investment of 30 lakhs will grow to 1.34 Cr.
That difference of close to 1Cr is largely due to your friend’s early investment. Even if you consider investing 15k every month starting at the age of 30, by the time you are 55, you would’ve invested 45L i.e 9L more than your friend. This investment would still grow to 2Cr which is lower than your friend’s return despite of you investing more. This is due to the time he has given for his money to work and earn interest on interests.
Look at the table below. Try to visualize. If you invest 10L and do nothing for 30 years, look what wonders can your money do to you in the long run.
Bottom Line is simple –
1. Start as early as possible
2. Stay Invested and don’t take the money out
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