Skip to content
logo
  • Cryptocurrency
  • Finance Tips
  • Investing
  • Make Money Online
  • Work From Home
  • Quiz
  • About Us
  • Privacy Policy
Compounding Wealth

The Power of Compounding: How your wealth grows like a snowball with time

Posted on March 11, 2022February 28, 2022 By Shrey Gupta No Comments on The Power of Compounding: How your wealth grows like a snowball with time
Finance Tips

When talking about finance and wealth, simple interest is the easy form of calculation of interest on investments. It works on the basic principle of percentage addition to the principal amount for the number of years applicable without any change in the base amount. Although it is a simple way to calculate interest, most financial instruments available in the market work on the principle of compound interest.

What is compound interest and how does it work?

Simply, compound interest is the interest earned on interest itself. Compounding means the computing of interest on the initial amount invested and also on the accumulated interest of the previous periods. Here, with every change in the period, the base principal changes because it is an addition of the original based principal along with the interest of the previous period. Although the rate of interest remains the same between the transition of periods, the amount of interest on with every success increases severely due to the addition of interest in the previous year. It is safe to say that compounding differs from linear growth where only the principal is on the interest in each period.

For example, take the base amount of rupees 1000 at 8% compound interest per annum. The interest after the first year would be rupees 80 and the base principal for interest calculation for the next year would be rupees 1080 instead of rupees 1000. So, the interest will be 8% of rupees 1080.

How to invest to earn compounded returns?

The secret to earning compounded returns is to begin early. A long-term investment strategy that has the consistent discipline and a clear understanding of how compounding works. It is a chain reaction by generating returns on the returns as long as the money remains invested in the financial instrument. Instruments including a systematic investment plan also known as SIP  take advantage of the compounding effect where you can invest small sums of money at a predefined interval to see it grow exponentially over a specific period. Time is a very important factor when investing for compounded returns.

Mathematically speaking, the shorter the time interval of compounding, the greater the impact on the returns. Higher the rate, the more the rate of returns gained. Suggest investing in equities that have a long investment horizon because they offer a better potential rate of return over a long period. This is the miracle of compounding and only small points need to be kept in mind to make full use of them to accumulate wealth and see one’s financial portfolio snowball into a big chunk of funds. Several types of calculations for averages in finance are available but when calculating average returns of an investment or savings account it is best to use a geometric average which is also known as the time-weighted average return or the compound annual growth rate in some cases. It is seen that healthy growth over a long period has always been working on a strong and sound foundation of compounding returns.

Tags: Crypto Cryptocurrency Equity Finance Tips Investing Personal Finance Stock MArket Stocks

Post navigation

❮ Previous Post: Taxation on selling US Stocks
Next Post: ULIP vs Life Insurance ❯

You may also like

Finance Tips
Key Takeaways from Rich Dad Poor Dad (Book Review)
July 7, 2022
Finance Tips
How to Account for Inflation in Your 2022 Travel Budget
October 5, 2022
Finance Tips
How to protect yourself against inflation?
April 3, 2022
Finance Tips
How to get an education loan
April 2, 2022

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

You may also like:

  • What is RBI’s Digital Rupee?
  • Top Money Management Apps
  • Loan Settlement and How Does It Affect Your Credit Score?
  • How to avoid the Debt Trap?
  • Essential Tips for Money Management
  • Buy Now Pay Later vs Personal Loan vs Credit Card
  • Google Pay: Check Limit On Daily Remittance Across India
  • Tax Saving Bank FD Vs Post Office TD: Where Should You Invest To Earn High Returns?
  • Exhausted Section 80C? Here Are Other Ways To Save More Taxes
  • LIC IPO 2022
  • What is FIRE- Financial Independence/Retire Early
  • Beginner’s Guide: Decentralised Finance (DeFi)
  • How To Choose The Best Term Life Insurance Policy?
  • How To Buy, Sell and Gift Digital Gold Through Airtel Payment Bank?
  • What Elon Musk would do with Twitter
  • What Can You Do in Decentraland’s Metaverse?
  • Investing lessons from Raamdeo Agrawal
  • How to Calculate Your DeFi, NFT, and Airdrop Taxes for 2022
  • How to Become Eligible for Token Airdrops
  • Investing tips from V. Vaidyanathan
  • Cryptocurrency
  • Finance Tips
  • Investing
  • Make Money Online
  • Work From Home
  • Quiz
  • About Us
  • Privacy Policy