It is a common saying that the benefit of compound interest can be availed by reinvesting your earnings as it exponentially increases your return on investment. Thus, it is needless to say that compound interest will help make a deposit grow at a faster rate as compared to simple interest (which is simply interest calculated on the principal amount).
What is Compounding?
Compounding refers to earning interest on interest income. Hence, if one continuously reinvests their earnings, their return on investment will increase exponentially. 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.” In other words, you are making your money work for you and later feel the snowball effect, when it creates wealth for you.
Why should one Choose Compounding?
The underlying idea of compounding is that you can generate returns on the returns already earned by you. Thus, you must keep in mind that every day your money stays invested is a day that your money is doing the work for you and as much as the savings period increases, the interest income also grows. As a matter of fact, by starting a regular savings plan at the earliest, you can take advantage of the power of compounding by increasing your return on investment.
One of the biggest benefits of investing early is that the power of compounding works well for young people (as the more time you have for this to work for you, the better it is) and thus the amount of monthly savings required will be low when compared to others. Thus, if you have recently started earning, investing a part of your income is one of the wisest decisions that you can make. Also, in order to let your money grow over a longer duration, you must start investing early.
By investing for a longer time horizon, one does not need to worry about ‘timing the market’ because the savings are anyway getting reinvested and they will result in a bigger corpus in the future. This is simply because the power of compounding works on the time value of money. Thus, it is true that regular investments in a retirement account or investment portfolio result in huge compounding benefits.
Benefits of Investing Early- The Power of Compounding
One must remember that the benefits of compounding can be experienced only when the chosen modes of investments actually perform well. One must evaluate an investment option before opting for it. Young people have a considerable advantage when it comes to investing. By starting early, young people have the potential to grow significantly more wealth and take on more risks.
Although the power of compounding works really well for those who start investing early, even if you have not started investing yet, you have not lost much. You can make up for the shortfall in years by increasing the amount you invest. But what must be understood is that compounding is a very beneficial tool, especially when you have to ensure that you have a secure option for your future.
Let the Magic of Compounding make wonders in Creating Wealth for you. Start Investing Today!