Albert Einstein stated Compound Interest as the Eighth wonder of the world, one who understands it earns it and others pay it.
Before we deep dive into the advantages of compound interest. Let me tell you an ancient Indian Rice and Chessboard story. Once there was a king who got impressed by the game of chess and gave on offer to the inventor of the game to ask whatever he wants and the man replied in this way
“Oh my king all I want is one grain of rice for the first square of my chess board, two for Second Square, four for Third Square, eight for Fourth Square and so on for all 64 squares of the board”
The king got amazed by his wish and asked the minister to collect the grains the man asked. Few weeks passed but the minister didn’t return to the king’s court. So the king asked him to return immediately and asked about the grains. The minister replied that Oh my lord we sent people to collect the grains but we still not able to procure all the gains the man asked
So guys what you think why this minister failed to accomplish such an easy task. Because it is not as easy as it sounds. If we calculate all the grain required for the man the number will be like this “18,446,744,073,709,551,615” and this is the power of Compound Interest.
Let us learn now how to make your money work for you by with the help of compound interest. If you have invested Rs.10000 as the base amount and deposited Rs.5000 per month for 20 years. If this compounds annually with a return of a minimum 15% then at the end of the 20th year the amount that accumulated in the account will be around Rs.68 lakhs (₹6,799,032.58)
If you observe the table carefully the total amount you deposited is around Rs.12 lakhs. The interest earned was around Rs.55 lakhs for 20 years. I hope now you can understand what compound interest can do with your money.
Now one question will be running in your brain definitely that would be “Who will give a return of 15% that compounds annually?” obviously no banks will give such returns. But there are many companies which grow more than 15% annually in India; if we invest in such companies that listed in the stock market we can expect the returns as mentioned in the above table. But here is the caution investing in the stock market involves risk do understand it before making your first step of investment.
In our upcoming posts I will explain how to find companies that give good returns.