The Power of Compounding –Investment Guide
This one takes a lump sum of money and compounds it monthly over a fixed period of time at a fixed annual yield. Plus it allows you to add monthly contributions.
The Power of Compounding calculator helps to ascertain the amount you need to invest every month for respective targeted period to achieve your estimated amount (corpus) at your anticipated rate of return.
Compounding is often either ignored or forgotten about by most people when it comes to investing. Compound interest is when you earn interest on top of interest. We have discussed compound interest earlier however when discussing investing the magic of compounding can never be overstated. The earlier you invest the more you can benefit from compounding interest; this is exactly why investing early is so critical. People often ask about what is the best investing strategy, the answer is best investing strategy is to invest early!
Compounding investment earnings is what can make even small investments become larger, given enough time. You are probably already familiar with the principle of compounding. The money you put into a bank account earns an interest. Then, you earn interest on the money you originally put in, plus on the interest you have accumulated. As the size of your account grows, you earn interest on a bigger and bigger pool of money.
Consider the example of the ant and the grasshopper from Aesop’s fable.
• The ant, recognizing the importance of saving, starts at age 25 and invests RS. 1,000 for 10 years in a portfolio that earns 5.5 percent a year. At that point she stops contributing. But her investment continues to grow; and when she reaches age 67, it is worth Rs.75,352.
• The grasshopper, who spends his money in the early years, doesn’t start investing until age 45. In order for him to make the same amount as the ant who started investing 20 years earlier, he will have to invest almost Rs. 1,750 a year for 22 years to catch up.
The ant not only earns money on his initial investment, but in subsequent years earns noney on previous years’ earnings as well.
The best way to take advantage of compounding is to start saving and investing wisely as early as possible. The earlier you start investing, the greater will be the power of compounding.
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