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Compound Interest – Compounding Money

“Compound interest is the 8th wonder of the world. He who understands it earns it. He who doesn’t pays it.”   - Albert Einstein

We’re all Familiar with CI

We all are familiar with the term  Compound Interest from our secondary school level Mathematics classes, aren’t we? But have we ever tried to understand the importance of it? How it can change our lives forever?

The answer must be no in case of 90% of the people. All we ever did was applied the formula in a piece of paper for better marks. 

But, if we apply the same formula in the real life scenario we can change our level of income and even become a millionare if passionate.

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Let’s Take an Example

Compound interest is the silver bullet when it comes to growing your wealth because the earlier you start, the more powerful it becomes. Let’s find out the difference between simple interest and compound interest.

  • Simple interest – If you start with Rs 10000 and earn 5% interest annually for 2 years without reinvesting the interest you earn, at the end of the 2 years you will have Rs.11000 – the 10000 you started with, plus 500 in interest for each of the 2 years you invest your money.
  • Compound interest – Your starting balance is reset after each year when you reinvest the interest you earn, and after 2 years you will have Rs 11025 – in the first year you earn Rs 500 on your investment, giving you a total of Rs 10500 at the end of the year. This Rs 10500 is then reinvested for another year at 5% interest, earning you Rs 525 for the second year.

Understand by Implementing

Well that example seemed a bit boring and not much difference in earning as well. Not Motivated for Compounding? However here is the main part or let’s say the principle of Compounding. As I’ve said before that I believe is in small but consistent efforts. With a small but consistent effort we can bring out the best output in the long term game. Yes its a LONG TERM GAME and needs consistency.

NOW lets take another example. Take a chess board. Place a coin at the first box. Now double the number of coin in the other box i.e 2 in the next, 4 then after, 8 in the next and so on. Keep doubling and adding up in the next boxes and keep going. Well that’s how it looks. The first few steps and you wont feel much is increasing unless you keep on going and reach a point that makes you realize the power of compounding 
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That was an quick overview of Compound Interest. If you want to know how can we Compound our money in Real Life Click Here.

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