Compound interest is the interest calculated on the principal and the interest accumulated over the previous period. It grows at an accelerated rate and can significantly boost investment returns over the long term. Over 10 years, a ₹100,000 deposit receiving 5% simple annual interest would earn ₹50,000 in total interest. But if the same deposit had a monthly compound interest rate of 5%, interest would add up to about ₹64,700.
For prosperity in life, achieving a deep understanding of compound interest is essential. Let me explain the power of compounding with a quote by Dr. Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Warren Buffett began investing at the tender age of 12, investing “self-funded” by the money he made delivering newspapers. As he consistently invested and increased his investment knowledge over time, his wealth grew in accordance with compound interest principles.
By age 30, Buffett went from a few dollars to a full million dollars in his portfolio. This was a lot for a 30-year-old, but not something that would turn him into a household name. It was only with additional years of persistent investing that he achieved his first billion in his 50s. With further compounding, he was worth >15 billion by age 65 and >85 billion at age 88. Notice that Buffett began investing so early. He has now been investing and compounding his interest for more than 75 years.
The compounding effect can work in other areas of life. It can aid and improve your health, career progression and romantic relationships among others. The human brain thinks in a linear pattern. Our belief is the relationship between effort and result should be linear. The expectation is that time, money, and effort will be rewarded in proportion to how much we have invested. However, these yield minimal rewards at the beginning and we give up. We are convinced that the poor payoff we obtained from our initial effort means that the same result will continue. This is followed by period of frustration and we finally give up. In reality, the initial poor payoff is working beneath our awareness. The modest beginnings of our effort will eventually reach a point where the payoff is enormous.
Compound interest works both ways. After years of sedentary lifestyle and unhealthy food, you can’t expect a few months of training and healthy diet to revert the damage caused to yourself. Own your mistakes, understand who you want to become in five years and start pushing
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