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Financial Planning

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Power of Compounding

For many the idea of accumulating huge sums of money seems like a daunting task. In fact often this is used as an excuse for not planning at all and leaving finances to chance. Rest assured, if you refuse to make a plan and adhere to it, there's a high degree of probability that you will never achieve your financial goals.

Another misconception is that you need higher savings/investments to achieve your financial goals. Whether you achieve your financial goals or not is more often a factor of your saving and investment habits. A combination of correct investment advice, proper investments and sufficient time can help you achieve all your goals.

Another reason why it is important to start early is because of the effect of compounding on our money.

Let us understand it with an example.

Shahrukh and Abhishek are friends who share their birthdays as well; both are building a corpus for their future needs.

Shahrukh starts saving ₹10,000 each year at the age of 30 years; on the other hand Abhishek starts his savings at the age of 40 (i.e. 10 years after his friend started his savings). However to make up for the lost time, he invests twice the amount i.e. ₹20,000 per year. Both of them earn the same returns on their savings i.e. 8% per annum. 

At the age of 50 years, their investment kitties would be ₹289,740 for Abhishek and a whooping ₹457,620 for Shahrukh. Despite investing a higher sum, Abhishek’s investments failed to match those of Shahrukh. The secret lies in the power of compounding.

When it comes to investments, time is money! The key lesson to be learned is to start early and give your investments sufficient time to grow. 

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