Magic of Compounding : You must have often heard the mention of the power of compounding in finance. If we understand the meaning of compounding in simple language, then it is earning interest on interest and thereby increasing the wealth of an investor rapidly. But keep in mind that if you want to take maximum advantage of compounding, then for this you will have to continue your investment with patience for a long time. If you are able to maintain your investment for a long time with a better scheme, then the real magic of compounding will be seen. Here we have given information about a rule of compounding, 7-3-2 Rule (8-4-3 Rule of compounding), through which after a time your wealth will increase by Rs 1.1 crore every year.
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7-4-3 Compounding Rule : How wealth will grow by Rs 50 lakh every year
According to this rule, you do a SIP of Rs 30,000 every month and consider the annual return to be 12% (yearly compounded 12% interest). At the same time, you plan to top up your SIP by 10% every year.
With this strategy, you will be able to raise Rs 50 lakh in 7 years after starting the investment. In just the next 3 years, i.e. 10 years after investing, your wealth will increase from Rs 50 lakh to Rs 1 crore. After this, it will take only 2 years to increase from 1 crore to 1.5 crore. After 15 years of investment, your wealth will start increasing by Rs 50 lakh every year.
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7-4-3 Compounding Rule : How wealth will grow by 80 lakh rupees every year
According to this rule, you do a SIP of Rs 50,000 every month and consider the annual return to be 12% (yearly compounded 12% interest). At the same time, you plan to top up your SIP by 10% every year.
With this strategy, you will be able to raise Rs 80 lakh in about 7 years (6 years, 10 months) after starting the investment. In just the next 3 years, i.e. 10 years after investing, your wealth will increase from Rs 80 lakh to Rs 1.60 crore. After this, it will take only 2 years to increase from Rs 1.60 crore to Rs 2.4 crore. After 15 years of investment, your wealth will start increasing by Rs 80 lakh every year.
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7-4-3 Compounding Rule : How to increase wealth of Rs 1 crore every year
According to this rule, you do a SIP of Rs 70,000 every month and consider the annual return to be 12% (yearly compounded 12% interest). At the same time, you plan to top up your SIP by 10% every year.
With this strategy, you will be able to raise Rs 1.1 crore in about 7 years (6 years, 9 months) after starting the investment. In just the next 3 years, i.e. 10 years after investing, your wealth will increase from Rs 1.1 crore to Rs 2.2 crore. After this, it will take only 2 years to increase from 2.2 crore to 3.3 crore. After 15 years of investment, your wealth will start increasing by Rs 1.1 crore every year.
Owner of up to 11 crores in 19 years
It is clear from the calculation that the benefit of compounding is available only through long term investment. If you maintain your investment for 19 years as per this rule, then you will get a fund of Rs 11 crore. In which you will have to start investing every month with a monthly SIP of Rs 70 thousand in a scheme where the annualized return is 12 percent. At the same time, you will have to top up 10 percent every year.
If you deposit 50 thousand rupees monthly as per this rule, then you can create a fund of about 8 crore rupees in 19 years. Whereas if you invest 30 thousand rupees monthly, then you can create a fund of about 5 crore rupees in 19 years.
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What is the Power of Compounding
When you invest your money, the return or interest on it can be added in two ways. First, simple interest or return, in which interest is added on the money deposited by you. Second, compound interest, in which return is added on the principal amount deposited by you as well as the interest earned on it. For example, if you have invested 1 lakh and the interest received on it after one year is 10 thousand. So if you add interest to the principal amount, this amount becomes Rs 1,10,000. Now the next interest will be added on Rs 1,10,000. This process will continue further.
