You must have heard the concepts of the Power of Compounding Interest in your mathematics textbook. Something that seemed boring in childhood can turn out to be pretty amazing in your adulthood. Yes! Compounding can build your wealth exponentially. And it’s even better if you start investing early.
In your 20s, the term ‘Savings’ may not be your first priority. Understandable! You would want to enjoy your own money. But, that’s exactly the right time to start building wealth for the future. The earlier you start, the better outcome you’ll see. And you will be amazed to know what compounding can do with your money.
Interested enough? Let’s find out more about it.
Let’s not get into the whole boring definition that you probably hated in school.
In simple words- The power of compounding is earning interest on both the principal amount plus the previously earned returns.
The interest that you earn on the principal amount gets reinvested every year. It allows you to earn interest on both the principal amount and the reinvested interest.
Whereas, if you opt for simple interest, you will only earn interest on the principal amount.
Let's say you've invested INR. 10,00,000 in a scheme with a 12% annual interest rate. You will receive 12% profit on your principal amount every year.
Here's the comparison of simple interest vs compound interest.
| Years | Simple Interest Earned | Total value | Compound Interest Earned | Total Value |
| 5 | 6,00,000 | 16,00,000 | 8,21,939 | 18,21,939 |
| 10 | 12,00,000 | 22,00,000 | 23,19,462 | 33,19,462 |
| 15 | 18,00,000 | 28,00,000 | 50,47,858 | 60,47,858 |
| 20 | 24,00,000 | 34,00,000 | 1,00,18,829 | 1,10,18,829 |
| 25 | 30,00,000 | 40,00,000 | 1,90,75,636 | 2,00,75,636 |
See the difference in returns between simple and compound interest.
In 25 years, your 10 lakhs @12% p.a. will become 40 lakhs with simple interest and 2 crores with compound interest. That's the power of compounding.
Note- Instead of a lumpsum investment, you can also consider starting a SIP of a mutual fund scheme to benefit from the rupee cost averaging and power of compounding.
Now let’s say, Abhishek, Ananya, and Simran are three friends who started a SIP of INR 10000 with 12% compounding interest till age 60. But, Abhishek started at age 25, Ananya at 30, and Simran at 35.
By the time Abhishek, Ananya, Simran are 60. Abhishek built more wealth than Ananya and Simran.
Now, as you can see in the above table, Abhishek invested an additional 12 Lakhs compared to Simran, who began investing early. By the time both reached the age of 60, Abhishek accumulated a total corpus of 5.09 Crores, which is MASSIVE 3.59 crores more than Simran.
Tip- You can build a large corpus from early investments and convert your lakhs into crores.
Often, newly employed people have the urge to spend money on things they always wanted to own. Investment isn’t on their mind.
However, you will probably have less responsibility and more time to start saving and investing. It’s the right time to build wealth for the future.
Market volatility and global economic changes are uncertain. It’s always better to have your financial goals aligned. Besides, when you are young, you can explore various investment instruments, take more risks, and build a diverse portfolio.
From the above table, you already know the benefit of investing early. That’s the best way to ensure a comfortable life for you and your loved ones.
Now that you know how early savings can grow your wealth exponentially, here are some tips that you can try.
It’s natural to have a spending habit in your 20s. After all, you are enjoying your youth. But, these are the years that can make your 30s, 40s, and retirement comfortable.
To have a balance between expenses and savings, note down your budget. It will help you identify certain expenses that can be cut down. As your mom would say- No need to order food online when we have plenty at home.
Also, you will come across some heavy expenses such as weddings, healthcare, child education, house, or car purchase anytime in the future.
These expenses can be done smoothly with thorough expense planning. Have a clear idea of what you want to financially achieve in the next 10 years. Cut down unnecessary expenses and invest them into mutual funds via SIP.
Read about the benefits of investing via SIP.
Discipline plays a very crucial role in investments. You have to be consistent to get desired outcomes. Plan your investments and execute them on time.
Nowadays, net banking offers an auto-debit feature to ensure you don’t forget an installment. Or simply use app reminders to have a consistent investment plan.
When you have a complex investment portfolio, it could get tricky to keep a track of everything. You can either note down all your finances in a secure folder or seek help from a financial expert who can do it for you.
With VNN Wealth, you can get your portfolio analyzed periodically and take an expert’s advice to manage your finances.
With the right investments, you can plan an early retirement and still have a comfortable life.
The earlier you start saving, the earlier you will have an envisioned wealth. Determining your investment horizon will help you figure out the necessary financial goals. Be it your retirement home or a long-due vacation, you will be able to do it all comfortably.
Patience is the key while building wealth. Most investors seek quick returns, which is not always possible. Remember, the power of compounding works better if you hold your investment for a longer time.
The main highlight of compounding is- your money makes more money. You earn interest on interest. And you use time as a variable to convert your lakhs into crores.
The earlier you invest, the larger the corpus you will build over the years. We would recommend starting a mutual fund SIP to benefit from compounding. It’s never too late to start building wealth.
The power of compounding works in the background as you continue to invest money. All you need is patience and of course, the right investment instruments.
Start planning your expenses and set financial goals for the future. If you need help crafting a sustainable investment portfolio, we are here for you.
Give VNN Wealth experts a call or send an email to discuss all the possible ways you can build wealth. Start early and save big!
