The key to financial success is investing for the long term. This allows you to optimise the benefits of the power of compounding.
Answer this simple question. In which case will you have more money at the end of a month— one paisa that doubles every day or -Rs 1 lakh a day? It seems like a nobrainer. Of course, Rs 1 lakh a day will build a larger corpus, right?
Wrong. Actually, one paisa per day will grow to Rs 1.07 crore in one month, whereas Rs 1 lakh a day generates a corpus of Rs 31 lakh (assuming 31 days in a month). Sounds incredible, but it is the magic of the power of compounding.
The concept of compounding is simple: when you first make an investment, you earn interest on the principle. If you do not withdraw the money, the interest is reinvested and you earn interest on not just the principle but also the interest. Over time, the total returns from the principle and reinvested interest grow exponentially, resulting in a large corpus.
According to the example in the graph, (see Magic of Compounding), if you start investing as little as Rs 1,000 a month, at the end of 30 years, your corpus will total about Rs 69 lakh, assuming that the instrument grows at an annualised rate of 15 per cent.
This is why experts suggest that you invest a small amount regularly as it gives a huge payback in the long term if you do not withdraw the money.
