How does your money grow? Compound Interest

While money is not a living thing, it can still grow! That growth is possible because of the power of investing and compounding.

So what exactly is compound interest?

It earns interest on the interest already earned. In other words, your interest on savings also earns interest. Suppose you deposit some money in your account today. The value of it will increase after a year on account of the interest earned.

Let's say you have ₹1000. It is invested in an asset that earns an interest return of 10% p.a.

Here is how it will grow in 10 years

Year	Amount	Interest
1	1000
2	1100	100
3	1210	110
4	1331	121
5	1464	133
6	1611	146
7	1772	161
8	1949	177
9	2144	195
10	2358	214

As you can see in the interest column, the earnings for the first year are ₹ 100, which increase to ₹ 110 in the second year because interest is also earned in the second year.

Let's understand this with a real-life example:

Meera, a 28-year-old teacher, receives a one-time bonus of ₹1 lac. She decides to invest it in a fixed deposit earning 8% annually. Instead of withdrawing the interest each year, she reinvests it (compound interest).

Year 1: ₹1,00,000 becomes ₹1,08,000 (interest: ₹8,000) Year 2: ₹1,08,000 becomes ₹1,16,640 (interest: ₹8,640) Year 3: ₹1,16,640 becomes ₹1,25,971 (interest: ₹9,331)

Notice how the interest amount keeps increasing yearly, even though Meera never added more money to her initial investment!

Now, if Meera had withdrawn the interest each year instead of reinvesting it:

Year 1: ₹1,00,000 earns ₹8,000 (withdrawn) Year 2: ₹1,00,000 earns ₹8,000 (withdrawn) Year 3: ₹1,00,000 earns ₹8,000 (withdrawn)

After 3 years, Meera would still have her original ₹1 lac plus ₹24,000 in interest withdrawals. But with compound interest, she has ₹1,25,971 - nearly ₹2,000 more without any additional effort.

It's a beautiful and almost magical concept that enables the creation of large amounts of wealth by investing small amounts of money every month.

And the higher the interest rate or return, the more your money can grow. Investment assets like equity and real estate have been in certain pockets, which have delivered returns of 15% to 20% per annum.

If your ₹ 1000 grew at 15% per annum, it would have grown to ₹4,045 in 10 years.

If it had grown at 20% per annum, it would have grown to ₹6,191 at the end of 10 years—or almost 6 times.

Of course, such high growth rates are not without risk, so you should have a diversified portfolio so your money can grow in a balanced and risk-adjusted way over the years.

Let's see how the power of compounding works in a systematic investment plan:

Suresh invests ₹10,000 monthly in an equity mutual fund that generates an average annual return of 15%:

After 10 years:

• Total investment: ₹12 lacs

• Corpus value: ₹26 lacs

• Growth: 2.17 times investment

After 20 years:

• Total investment: ₹24 lacs

• Corpus value: ₹1.24 crores

• Growth: 5.17 times investment

After 30 years:

• Total investment: ₹36 lacs

• Corpus value: ₹5.54 crores

• Growth: 15.39 times investment

The difference between the 20-year and 30-year outcomes shows just how powerful compound interest becomes in the later years!

The earlier you start investing your savings, the higher the benefit.

However, it's not too late even if you are older and haven't started. As they say, "Better late than never!" -- The most critical action you need to take is to START INVESTING NOW!