“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.
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.