Everyone of us wants to be rich. We wish our money grows by leaps and bounds in short span of time. But do we follow the simple path to financial fitness? Discipline is at the core of this mantra that leads us to wealth creation in the long term.
Compound interest is one simple way of growing money exponentially over a period of time. According to Albert Einstein, “Compound interest is the eighth wonder of the world. He, who understands it, earns it ... he who doesn’t; pays it. The most powerful force in the universe is compound interest.” He considered compound interest as the greatest mathematical discovery. It is simple and powerful concept which is easy to understand and follow.
Warren Buffet says “My wealth has come from a combination of living in America, some lucky genes, and compound interest.” Note the emphasis on ‘compound interest’.
The basic concept of compund interest includes investing the principal as well the interest amount on a countinous basis. Suppose a person invests Rs 10,000/- @ 10% p.a. He will get an interest of Rs. 1000/- every year, which means at the end of 10 years his amount will double to Rs. 20, 000/-. However, if he invests the interest along with the principal, at the end of 10 years, he will accumulate Rs 25,937/-
One needs to follow some important rules while doing so. The first rule would be to start early. By starting early the two factors of compound interest, time and reinvestment, which play a major role in growing the corpus, get a head start. For example if Kiran (25 years), his colleague Shyam (30 years) and their friend Atish (35 years) decided to invest in their retirement fund starting from now. Kiran and Shyam, started investing Rs 5,000 on a monthly basis at a rate of return of 8%. Atish started a periodic investment of Rs 7,000 at the same rate of return. At the age of 59 years, the accumulated wealth of Shyam and Atish were Rs 6,510,090 and Rs 5,855,406 respectively. On the other hand the accumulated wealth for Kiran was a staggering Rs 9,930,181. You can see that even while investing more than Kiran and Shyam, the accumulated value of Atish's investment was just a little more than half of Ram's wealth.
If it is not possible to invest large amount of money, even a small amount on a regular basis helps. Investing amounts as low as Rs 500 to Rs 1000 over the long term helps to accumulate a substantial amount over a period of time.
Among the many avernues available for investments, one of the best is Public Provident Fund (PPF). Simply put the power of compounding to use and it becomes a great play. Just Rs 10,000 saved per year becomes Rs 2,93,000 in 15 years…and its tax free and safe.