The 8th Wonder of the World - The Power of Compounding
- Derrick Lee
- Oct 9, 2022
- 3 min read
Updated: May 5, 2023
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”.
What is the power of compounding?
Mathematically speaking, compounding is defined as, ‘the increase in the value of an investment, due to the interest earned on the principal, as well as the accumulated interest.’
Simply put, it is a strategy that makes your money work for you. It could be regarded as a powerful tool to grow your wealth. You can use the power of compounding to plan your future goals, such as retirement.
Benefits of the power of compounding
One of the biggest benefits that investors can appreciate about the power of compounding is the value of time. With time, you could gain returns, and the yields on these returns could further generate returns; thus, helping to increase your investments quickly.
It is crucial to start saving and investing from an early age. And when you do this regularly for an extended period, you stand a chance to maximize your returns and benefit from the full power of compounding.
Many people wrongly assume they can begin investing only when they have large sums of money. Therefore they delay investing until they are in their mid-forties. This is not a sound investment strategy. On the other hand, when you start investing from an early stage, it doesn’t matter how much you can invest. Even if you invest small amounts of money regularly, you can hope to achieve a significant corpus over time.
Power of Compounding and mutual funds
Where can an investor put his money to achieve the full benefit of compounding?
The answer is Mutual Funds.
As an investment avenue, mutual funds are designed in a way to magnify the benefits of compounding. This is possible through systematic investment plan.
Here’s how it works: You can invest a fixed sum in mutual funds regularly through a regular premium investment plan. You can select the fund of your choice, and investing regularly through systematic investment plan could magnify your returns over time.
While you can invest in most fund types through a regular premium investment plan, you may want to consider investing in equity funds for long-term goals like retirement planning. This is because equity funds have the potential to offer better returns in the long-term.
Key rules to enable the power of compounding
Control your expenses
The principle of compounding works in the same way whether you invest $100 or $10,000. However, if you invest a substantial amount, the interest you earn can also increase significantly.
The best way to harness the power of compounding is to raise your investments. But if you have a limited income, you can increase your savings by controlling your expenses. One way to do it is to create a budget and identify areas you can reduce your costs each month. Spending wisely and smartly can increase your savings and you can invest more. This way, you stand a chance to reap better returns.
Start early
There is nothing like making an early start in investments. Ideally, you should start investing the moment you begin earning. But if you have already crossed that stage, the next best thing is to start investing now. Identify a mutual fund that is in line with your financial goals and start investing. When you start investing early, you can create a solid base for your funds to grow and expand in the future with the help of compounding. If you don’t know how to calculate the return on investment, you can speak to a trusted financial advisor. He will be able to tell you how much you need to start investing today to future goals.
Be disciplined
To create a healthy nest egg and meet your financial goals on time, it is critical to have investment discipline. Investing regularly at the start of your investment journey can ensure discipline. It is wise not to skip your regular investments. When you regularly invest month after month, you not only increase your savings but also develop investment discipline. This is a vital habit if you wish to achieve financial success.
Learn patience
Most investors look to chase quick returns. But in the attempt to earn quick money, they can make mistakes that could result in big losses. As we have seen, the power of compounding magnifies over time. Hence, it can help to have a long-term approach towards investing. One must invest patiently that could reap healthy returns over time.
You don’t need to be a financial expert to benefit from the power of compounding. Every investor can take advantage of this concept and put it to good use.
So, start investing today to enjoy a great future.
Empower Yourself Now!
Many of my clients has already embarked in their investment journey with the power of compounding.
Chat with me to learn how you can make use of the power of compounding to build your golden nest egg!
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