The Power Of Compounding: The Rule Of 72 And Other Hacks To Grow Your Money – News18
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Compounding helps savings grow by earning interest on the principal and accumulated interest. For instance, Rs. 1,00,000 at 10% for 20 years becomes Rs. 6,72,000.
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Compounding Formula: Compounding is a powerful financial concept that allows savings to grow significantly over time. Unlike simple interest, which is calculated only on the principal amount, compound interest is earned on both the principal and the accumulated interest. In essence, it’s “interest on interest,” leading to exponential growth.
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”
The Power Of Compounding: How Does It Work
Let’s consider an example: investing Rs. 1,00,000 for 20 years at a 10% annual interest rate. With simple interest, the investment would grow to Rs. 3,00,000. However, with compound interest, the same investment would reach Rs. 6,72,000, showcasing the substantial difference compounding can make.
You can use SEBI’s compounding calculator to check expected growth of investment.
Simple Rules For Estimating Compound Growth
To quickly grasp the impact of compounding, you can use these helpful rules of thumb:
Rule of 72:
This rule helps estimate the time it takes for an investment to double. Divide 72 by the annual interest rate. For instance, at a 9% interest rate, it would take approximately 8 years (72 / 9 = 8) for the investment to double.
Rule of 114:
To estimate the time needed for an investment to triple, divide 114 by the interest rate. Using our 9% interest rate example, it would take roughly 12.66 years (114 / 9 = 12.66) for the investment to triple.
Rule of 144:
This rule helps calculate the time required for an investment to quadruple. Divide 144 by the interest rate. At 9%, the investment would quadruple in about 16 years (144 / 9 = 16).
Things You Should Know Before Investing
Wise investing can grow your money faster than a savings account, but remember, investments carry risks. Before starting, understand your financial goals, how long you plan to invest, and your risk tolerance.
Begin with basic investments and gradually explore complex options. Prioritize safety, returns, and liquidity. While past performance is informative, it’s not a guarantee. Diversify your investments across different asset classes to manage risk. Finally, create an asset allocation strategy that aligns with your financial goals, risk tolerance, and investment timeline.
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