You have read about both simple interest and compound interest during your studies. You may be knowing that your bank also offers both the kinds of interests on your deposits. Your Fixed Deposits may have simple interest or compound interests based upon the offer of the bank. Mostly, if you get interest on a monthly basis then it’s simple interest and if you get interest on a quarterly, six monthly or yearly basis then it’s compound interest.Compound Interest can be understood as something which is long term and can give you much better benefit thus growing your money faster than simple interest.
Let’s understand compounding with an example
If you invest Rs. 10,000 for 10 years at an interest rate of 10% per year then at the end of one year
you will earn Rs. 1000 so your invested amount now becomes 10,000+1000 i.e. 11,000. Now at the
end of 2 years you would earn 1,100 i.e. interest on Rs. 11,000.
This simply means that your principal stays intact and your interest earned gets added to your
principal amount and even the interest earns interest.
How to get the best of Compounding Returns?• Stay invested for a longer time
• A quarterly compounding is more beneficial than yearly compounding
• Compounding Return can lead to long term financial security and freedom
• Invest at an early age to reap the benefits later
• Let your returns (be it dividend or interest) reinvested rather taking it out
Albert Einstein once said that “Compound interest is the eighth wonder of the world. He, who understands it, earns it … he who doesn’t… pays it.”
Now if Albert Einstein speaks about Compound Interest in such words then it has to be looked at seriously to take the advantage of this principle of growth in the financial or the capital market.
Even Mr. Warren Buffet used the power of Compounding to grow his wealth and became one of the wealthiest man.
If you would like to learn more about the how to use power of compounding to grow your wealth exponentially then we can guide you in understanding the same in more details and also help you use the power of compounding to grow your wealth and attain financial freedom sooner.
For more information visit www.prajinvestments.com
