Compound interest can help investors create a significant amount of wealth. However, not many know about its importance. With the help of compound interest, investments can grow exponentially.
In this article, we will discuss 3 compound interest lessons that can help investors understand its importance.
In order to make a lot of money, people look for various investment options. One of the most important factors that they should also understand while searching for investments is compound interest.
What Is Compound Interest?
Compound interest is the interest that a person earns on interest. It is the interest calculated by adding the principal amount and the accumulated interest from previous periods. The more the compounding periods, the higher the likelihood of an investor earning higher returns. Thus, in order to gain higher benefits from compound interest, a person should stay invested for a longer duration. Interest on interest can lead to investments earning returns continually. Furthermore, an individual can use a compound interest calculator to calculate the returns he/she can earn with compound interest.
The Importance Of Compound Interest
Compound interest can help investments to grow faster. It can allow money to grow exponentially compared to simple interest. This is because compound interest enables the investor to earn returns from the money invested as well as on returns generated once a compounding period ends.
Let’s take a look at a few lessons that explain how compound interest can help investors-
- Start Investing Early
One of the most important things that investors should do in order to earn higher returns is starting to invest from an early age.
For instance, Rahul and Amar are 25 years of age and plan to retire by 65. However, their approach towards investments is different. While Rahul wants to start investing from the age of 25, Amar plans on starting to invest by 30.
Thus, Rahul starts investing from the age of 25 and invests Rs. 10,000 every month for 10 years. His investment will grow to Rs. 25.90 Lakhs after 10 years. He invests the lump sum amount until he retires. Therefore, by the time he turns 65, his investment can grow to Rs. 6.34 Crore. However, Amar starts investing from the age of 30. He invests Rs. 10,000 every month for 10 years. After 10 years, he invests the lump sum amount until he retires at the age of 65 years. However, his amount will be half of Rahul’s funds because Amar delayed investing from a young age.
- Stay Invested For A Longer Tenure
Investors can reap a lot of benefits with compound interest if they plan to stay invested for a longer tenure. This is because investments with longer tenure will have a higher frequency of compounding periods.
For instance, Mr. Iyer invests Rs. 1 Lakh in an investment instrument that provides him with 14% returns. After 20 years, his investment can grow to Rs. 13.74 Lakhs. Furthermore, after 30 years, his investment will grow to Rs. 50.95 Lakhs.
- Invest Now To Earn High Profits Tomorrow
In order to earn significant returns, investors need to create a financial plan that allows them to make investments in instruments with compound interest. Making investments now might be difficult for many investors but its benefits will also be substantial.