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The Power of Compounding

    Mr. C.S. Sudheer | Friday, June 20,2008, 12:05 PM
 

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 or not :

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.

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:

  • How much money you invest
  • How much time it spends growing
  • 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 these things:

  • 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 month.
  • You can take a small amount of money and make it a bigger amount in just a few years.

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 compounding.

Happy compounding!

Mr. C.S. Sudheer

Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.

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