Unlocking the Power of Compounding
Simply put, Investment is making your money work for you. But if this money can fly with the power of compounding, something truly magical is happening. So, let us examine the concept of Power of Compounding.
Compounding basically denotes how money makes money over a long period of time. It is known as the world's eighth wonder because it changes one into hundreds and hundreds into lakhs and lakhs into crores over time. Through the power of compounding, investor earns interest on your interest and stay invested for long term, this requires patience.
Albert Einstein "Compound interest is the eight wonder of the world. He who understands it, earns it, he who does not pays it"
Compounding in the world of finance refers to the ability of money to grow itself. It builds upon the fact that money can grow exponentially when you keep reinvesting your profits.
Simple interest and Compound Interest
Simple interest is the interest that gets paid only on the outstanding principal. Compound interest is paid on both interest and the principal outstanding.
Compounding is a powerful way to build wealth.
It’s when the earnings from your investments get added to your original investment pile (reinvested) and those earnings then build upon themselves. Over time, these returns can compound on themselves, creating a snowball effect of growth.
What are some ways to use this power of compounding?
- Compounding is most commonly associated with long-term investing, such as investing in stocks, bonds or mutual funds.
- When investors reinvest their dividends or interest payments, they can take advantage of compounding to accelerate the growth of their investments.
Let us illustrate this concept with an example.
Imagine you have a magic bean that doubles every night. You plant it in a pot, and when you wake up, there are two beans! You leave those beans in the pot, and the next morning, there are four! Each night, the beans keep doubling, growing faster and faster.
Compounding is like that magic bean. It's a way of making something grow quickly by starting small and letting it build on itself.
Think of your money as beans. Every time you save or invest, it's like planting a bean. And just like the magic bean, your money can grow and multiply over time, even while you're sleeping!
Best wishes and keep investing.🙋🙋🙋🙋🙋🙋🙋💰💰💰💰💰🤑🤑
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on Investment or recommend buying and selling any stock
