The Free Press Journal

POWER OF COMPOUNDIN­G

- FINANCE FUNDAS Viral Bhatt

(Viral Bhatt is the Founder of Money Mantra, a personal finance solutions firm)

Ever heard of the magical world of compoundin­g? Well, buckle up because we’re diving deep into the power of compoundin­g and why it’s not just some boring finance term you can brush aside.

What is compoundin­g?

Compoundin­g is like a secret superpower that allows your money to grow exponentia­lly over time. It’s the ability of your investment­s to generate earnings, which are then reinvested to generate even more earnings. It’s like a snowball rolling down a hill, gaining momentum as it goes.

When you invest your money, it has the potential to grow, thanks to the power of compoundin­g. Over time, your initial investment can earn you additional returns, and these returns can then earn you even more returns. But, the longer you stay invested, the greater the power of compoundin­g becomes.

So, whether it’s in the stock market, real estate, or even a high-yield savings account, the key is to let your investment­s grow and compound over time. The longer you wait, the more your money can work its magic.

Magic of time

Compoundin­g is like the fairy godmother of investment­s. It takes your hard-earned money and waves its mystical wand, turning it into a gigantic pile of wealth through the power of time.

Let’s break it down. Compoundin­g thrives on two things: consistenc­y and time. The more time you give it, the more powerful it becomes. Why does time matter so much? Let me tell you a little story. Once upon a time, there were two friends, Ram and Shyam. Ram started investing at the age of 25, while Shyam decided to put it off until 40. Few years later, Ram is sitting with a mountain of cash, while Shayam is wondering why he didn’t start earlier.

The moral of the story: The early bird catches the compoundin­g worm. Time is the secret sauce that transforms your average investment into a mind-boggling sum. So, start early and let compoundin­g work its magic.

Compoundin­g in real life

Let’s break it down further. Say you invest 1000 and it grows by 10% annually. In the first year, you earn 100. But in the second year, you earn 110, not just on your initial investment, but also on the 100 you earned in the first year. Now, if you consistent­ly nurture this money tree by reinvestin­g your earnings, the initial 1000 can blossom into a hefty financial oak tree.

The key is to be patience and let time work its magic. The next time you hesitate to invest, remember that every day counts in compoundin­g. Start small, stay consistent, and watch your wealth grow effortless­ly over time. It’s the closest thing to a financial magic trick you’ll ever witness.

Why start early

The thing is, compoundin­g needs time to work its magic. Imagine you start investing at the age of 25. You put some money into a fancy investment account and let it simmer for a good 40 years.

By the time you’re ready to retire, that initial investment will have grown into a mighty fortress of financial security, like a knight in shining armor (or in this case, a financial knight in a tailored suit). But if you wait until you’re 40 to start, well, let’s just say the growth won’t be quite as impressive. It’s like trying to grow a garden in the dead of winter - you’ll have a hard time getting those flowers to bloom.

Snowball effect

Now that we understand the concept of compoundin­g and, let’s dive into the realm of the snowball effect. Imagine a small snowball rolling down a snowy hill, slowly but steadily gathering more and more snow along the way. That’s exactly how compoundin­g works!

When you start investing early and allow your money to grow, it’s like that tiny snowball. At first, the growth may seem insignific­ant, but as the years go by, your investment keeps growing, just like the snowball rolling down the hill. The magic lies in the snowball’s ability to capture more snow, just as your investment captures more returns.

This means that not only is your initial investment working for you, but also the returns it generates. Your money starts multiplyin­g exponentia­lly, building upon itself and creating more wealth.

Conclusion

Compoundin­g is like planting seeds in the financial garden and watching them grow into money trees. Start early to witness the magic of time turning small investment­s into a substantia­l wealth snowball. Remember, the key here is consistenc­y and patience.

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