There’s an old man called Time who is good at compounding. He compounds your savings and your debts and depending on what you choose, the experience can be either pleasurable or miserable. But what is compounding, therefore compound interest? What does it mean to your personal finances? For a better understanding, here are the 5 interesting factors about compound interest in personal finance.
And a noble man said it:
According to Albert Einstein, “Compound interest is the greatest mathematical discovery of all time,” where the results are determined not only by how much one invests but also for how long one can continue to invest. So, as mentioned earlier, Time, the old man knows how to compound. Sow your investment and let time grow it!
This is how it is:
For example, if you save an amount of INR 1000 each month for a period of 12 years at 8 percent compound interest, your account is worth INR 184000. And, then even if you just let the money be without further monthly savings, in another 15 years, it’ll be more than INR 270000.
No rich, no poor:
The principal of compounding works the same whether you invest a thousand or a lakh or more. The rich may have more options to explore but even the ones from lower income bracket can also benefit from compound interest. As explained above, money compounding at 8 percent a year will double up in 12 years and will worth four times as much in 24 years.
Irrespective of whether you are saving or borrowing, the maths of compounding remains constant. It’ll be awesome if you are saving regularly and disastrous if you borrow. For savings to compound, shorter the duration of investment, the better it is. Likewise, if you have a debt, shorter the duration of your payback the better it is.
Keeping in the good books:
If you are not ready enough for an SIP, no sweat! Any amount is good for principal reduction on your debt (home loan or credit card). This will help reduce the interest from compounding against you. If your priority is to live a debt free life, you can always pay extra towards your scheduled EMIs.
Becoming wealthy is neither rocket science nor cherry picking. As mentioned above, Compound Interest catches up rapidly than simple interest. And remember Time, the old man? He says, the younger you are the better you compound your savings. At 25, you have more chances of becoming a millionaire than someone at 35 who may invest double the amount you would start off with. If you start a Systematic Investment Plan (SIP) now, you can see how fast compounding interest works to your advantage. To know more, visit our Financial Planning site arthayantra.com.