Magic of Compounding — How it works?

Compound Interest is the 8th wonder of the world. He, who understands it, earns it; he, who doesn’t pays it!’ — Albert Einstein

Successful investing means growing your money through compounding — your entire Investable Surplus — and not taking high risks, making bets on finding multi-baggers and big winners. You don’t need to take a high risk or expect 20% returns, you need to allow the compounding to happen.

To allow compounding to make its magic work on your investments, do these 3 things,

1. Have patience!

Look at this graph. If you invest 1 lac and allow it to compound at 8%, you will have Rs. 2.15 lacs after 10, Rs. 4.66 lacs after 20 years and Rs. 10 lacs after 30 years. In the 1st10 years, you earn Rs. 1.15 lacs, the 2nd 10 years period Rs. 1.5 lacs and in the 3rd next 10 years Rs. 4.4 lacs! And, the earnings will go on increasing exponentially! So, have patience, allow compounding to work.

2. Start early!

In compounding, when you start saving outweighs how much you save. Look at this graph

If you invested Rs. 1 lac every year from age 20 to 40 and compounded at 8%, then by 60 you would get Rs. 2.3 Cr. If you started 10 years late, invested from age 30 to 50, you would get Rs 1 Cr — from 40 to 60, just Rs. 45 lacs. In all cases, you invested for the same 20 years! So, what changed? You allowed the compounding to start early! So, with pretty decent income and with a little self-control on spending you can start investing early

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