The Magic of Compounding Interests in Investing

Growing up, most of us were taught that you can earn an income only by getting a job and working. And that's exactly what most of us do. There's one big problem with this: if you want more money, you have to work more hours. However, there is a limit to how many hours a day you can work.  

You can't create a duplicate of yourself to increase your working time; so instead, you need to send an extension of yourself---your money---to work for you. That way, while you are putting in hours for your employer, doing your own house chores, socializing with friends, or even sleeping, you can also be earning money elsewhere.   How do you make money work for you?  Through investing! But to understand what is investing, we must, first of all, know what it is not. Investing is not gambling, which is putting your money at risk by betting on an uncertain outcome with the hope that you might win money. For example, hoping to turn Rs1000 into Rs 10,000 overnight is not investing; it’s gambling. The only people who get rich from such get-rich-quick schemes are the people selling them.  They play on your emotions, set you up for a quick return, take your money, and then leave you high and dry.   Unfortunately, a lot of people still believe that investing is a complicated thing---as if there’s one big secret to making money, and only those who figure it out get to be rich. In fact, the opposite is true. For example, many high-net-worth people essentially follow a simple, even boring, investment plan over the years. That is, they do the same few, simple things over and over again, for a long period of time. Why?  Because it works.   The days when everyone worked the same job for 30 years and then retired to a nice fat pension are gone. Today, investing is becoming more of a necessity. For average people, investing is the only way to increase their personal freedom, their sense of security and the ability to afford the things they want in life.   Now, let me ask you a question:  If you have Rs 50,000 in hand, which is over and above your current needs, what would you do with it?  Perhaps, here are some choices you could consider:     So, there are many different ways you can go about making an investment. This includes making money from saving accounts, certificates of deposit, bonds, stocks, real estate, or starting your own business. Sometimes people refer to these options as "investment vehicles," which is just another way of saying "a way to invest." The point is that it doesn't matter which method you choose for investing your money, the goal is always to put your money to work so it earns you an additional income.   Why is the difference between a few percentage points of return so massive after long periods of time?  The answer is in the miracle of compounding. When your investment gains (returns) begin to earn money, and then those returns start to earn money, your investment can grow very quickly. To put it another way: if you extend the time period of your investment or raise the rate of return, your results will increase exponentially. For instance, if you start young, say, at 15 years of age, note how quickly a single Rs 50,000 investment grows, especially in the later years.   Here's an example: In 1791, Ben Franklin, one of the Founding Fathers of the United States of America, died and left $5000 to be invested for a period of 200 years to benefit medical students and scientific research.  If this money were to earn 7 percent annually, the investment would have doubled in value every 10 years. So, his investment of $5000 would have doubled 20 times over the 200-year period. At the end of 200 years of compounding, the investment would have been worth 220 × $5000, which is over $5 billion.   As these examples show, growth rates and interest rates compounded over many years can lead to spectacular results. That is probably why Albert Einstein once called compounding “the greatest mathematical discovery of all time.”   So, what’s your plan of action when it comes to managing your own money?  Do you want to make your money work for you?  If so, investing is what you need to do.