The Power of Money Compounding- Series 1A

Start early, save consistently

Often, it is seen that investments are generally the last thing on your mind in your early 20s. You probably didn't know a thing about investing during your college days. The pocket money went straight to splurging on shopping, gadgets, theatres etc. The earlier you realise the importance of investing, the more time you would have for your money to compound and build a huge corpus. The adjacent table shows a simple representation of the power of compounding.

The table shows that if you save Rs 10,000 per month for 10 years (that is Rs 12 lakh at the end of 10 years) and if it compounds every year at a rate of 8 per cent then at the end of the 10th year you will get a corpus of Rs 18, 29, 460. But if you continue investing Rs 10,000 per month for another 10 years (that is Rs 24 lakh at the end of 20th year) and if this money compounds itself at 8 per cent then you build a corpus of more than Rs 58 lakh. That is you double your invested amount in 20 years.

Doesn't sound very mouth-watering, does it? No. Well, the power of compounding works handsomely when you let your money grow for a longer period of time as the table and the two illustrations below highlight. Apart from the time factor the other assumption that changes is the rate at which your money grows.

Now, if the same Rs 10,000 per month grows at 10 per cent per annum then your Rs 24 lakh (at the end of 20th year) will get you an amount that is more than three times (Rs 75 lakh) your invested amount (Rs 24 lakh). Likewise, if the same amount of Rs 10,000 per month (Rs 24 lakh in 20 years) compounds at 15 per cent every year for 20 years then you end up becoming a crorepati: that is, your actual investment of Rs 24 lakh returns Rs 1crore and 49 lakh.

Numbers do look good when tabulated; however, it is indeed a Herculean task to translate them into reality! You may observe now that it is not just time and money that commands the direction in which your corpus grows; there is one more important parameter which determines the same: rate of returns. For nobody can give you an assurance that your corpus will grow every year at a given rate.