What is Compounding ? | Power of Compounding
The Power Compounding known as the Eighth Wonder of the World, and in today’s topic, we will be discussing what it is and how we can benefit from it. This term refers to the ability of an asset to generate earnings, which are reinvested to generate even more earnings over time. This compounding effect can result in significant long-term growth in wealth.
The reason why it is called the Eighth Wonder of the World is because of the incredible impact it can have on wealth creation over long periods of time. By reinvesting earnings, the compounding effect can snowball, leading to exponential growth.
We can benefit from the Power of Compounding by starting to invest early, being consistent with our investments, and reinvesting any earnings we receive. By doing this, we can benefit from the compounding effect over time and see significant growth in our investments.
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Power Of Compounding
Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” This quote highlights the incredible power of compounding interest, which can work in our favor if we understand it and utilize it, or work against us if we don’t understand it and end up paying more.
What is Compounding ?
When we use COMPOUND INTEREST, we earn a lot more profit on our money. To benefit from the Power of Compounding, we need to keep reinvesting the benefits of compound interest received on our money for a long time, according to our financial goals and a predetermined time until we reach our “big financial goal.” For example, an investment of Rs. 10,000 can turn into Rs. 10 crore in 30 years by using the Power of Compounding.
To achieve this, you need to invest Rs. 10,000 at a rate of 36% annual Compound Interest, and keep reinvesting the compound interest received every year in the previous total capital for 30 consecutive years. In this way, you will see that with just Rs. 10,000 at a compound interest rate of 36%, you can accumulate Rs. 10 crore in 30 years.
In the same example, if it were Simple Interest, then we would have received an annual profit of Rs. 3,600, and for 30 years, the total profit would have been Rs. 1,08,000 on the principal amount of Rs. 10,000.
So, friends, this is the difference between the POWER OF COMPOUNDING and SIMPLE INTEREST investment. Even though everything is the same – time is 30 years and investment amount is Rs. 10,000, the difference is significant. The use of COMPOUND INTEREST instead of SIMPLE INTEREST has made a massive difference, and Rs. 10,000 has grown to Rs. 10 crore in 30 years.
The use of the POWER OF COMPOUNDING
You can use the power of compounding to achieve any of your long-term goals, and create as much wealth as you desire. You need to think about how much money you need in the long-term, and determine how much compound interest you need to earn each year to acquire that amount.
Once you know the necessary compound interest rate to achieve your financial goal, you must invest your available funds in a disciplined and consistent manner at that rate of compound interest for an adequate period of time. By doing so, you can definitely use the power of compounding to create as much wealth as you want.
POWER OF COMPOUNDING – The World’s Biggest Wonder
Robert Kiyosaki has written in his book, Rich Dad Poor Dad, mentioning the Power of Compounding.
”The greatest wonder among all wonders in the world is “The Power of Compounding.”
And mentioning a real-life incident, it is said that the purchase of Manhattan Island in America is considered one of the greatest deals in the world because the entire New York City was sold for only $24 in this deal. Yes, the world’s largest and wealthiest city was sold for just $24.
Many people will take this as a joke, and many will be amazed at how such a big city in the world was sold for only $24. However, when Robert Kiyosaki added the story to the “Power of compounding,” you may be even more amazed by his statement.
He further explained that this deal was made around the end of the seventeenth century, around 1695. Although in today’s world, thinking about that city and its $24 deals would seem foolish, but consider this – if that $24 was invested at an 8% compounded interest rate, then the value of that $24 in 300 years would be $2,55,468,811,638.06.
Maybe it takes you some time to read this number, but please note that this is only at an 8% compounded interest rate. If we talk about a slightly higher interest rate, then this number becomes much more significant, so much that the New York City can be repurchased using that same $24 and the power of compounding.
And even after that, the amount would still be enormous, so enormous that it’s difficult to comprehend.
”The one who understands the power of compounding earns gains from it, and the one who doesn’t understand it incurs losses.”
In conclusion, the Power of Compounding is a powerful tool for wealth creation and is known as the Eighth Wonder of the World because of its incredible impact on long-term growth. By understanding how it works and implementing it into our investment strategies, we can benefit from its potential and see significant growth in our investments over time.