How compound interest turns small savings into big wealth
What's the story
Compound interest is a basic concept of finance that plays a major role in long-term financial decisions. It refers to earning interest on the principal amount as well as the interest earned in the previous periods. This potent mechanism can result in exponential growth of investments over time, making it an essential factor for those looking to plan their finances. Here's how it works.
Growth factor
Power of compounding over time
The longer you invest/save money, the more pronounced the effect of compound interest. For example, an investment of ₹10,000 at a 5% annual interest rate, compounded annually, will grow to around ₹16,289 in 10 years. This clearly shows how time magnifies the advantages of compounding, and why you should start investing/saving early and regularly.
Savings boost
Impact on savings accounts
Compound interest can work wonders for savings accounts by adding to the total amount saved over time without further deposits. For instance, if you deposit ₹5,000 in an account with an annual compound interest rate of 3%, the amount will grow to around ₹6,720 after 10 years. This shows how even small amounts can add up to a lot when you leave them untouched.
Strategic planning
Influence on investment strategies
Investors also use compound interest to their advantage by reinvesting their earnings into their portfolios. This way, if you do it consistently over the years/decades, you can get a lot more than what you would with simple interest. It takes a lot of patience, but it pays off in the form of increased wealth.