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What is Compound Interest?

Do you know what is the meaning of “Magic of Compounding?”

Compounding is simply the interest earned on interest. This earning on the interest leads to substantial growth in investments and savings. So, even a smaller initial investment amount can fetch you higher wealth accumulation provided you have a longer investment horizon.

What is the power of compounding?

Let me tell you a small story which will help you to understand the power of compounding easily.

There once was a king whose daughter was very ill. The king announced to his people that whoever cured his daughter can marry the princess and ask for another reward. One young man came and cured the princess with his family owned secret remedy.

The king was so happy that he anxiously asked the young man what else he wanted besides marrying the princess as his 2nd wish. The young man pointed to a chess board with 64 squares on it and asked the king to put one grain of rice in the first cube and two in the second, four in the third, and eight in the fourth, and so on until the 64th square is filled up.

The king laughed and confirmed his wish that he really wanted rice grains and not GOLD!! The King did not realize what he agreed to at that particular time.

By the time they reach 32nd cube all the rice reserves of his Kingdom were exhausted! It was staggering 214 Crores grains of rice itself.. Each of the subsequent cubes required the King to double up the number of grains. King had to ask other Kingdoms for Grains and till he reached 45th cube the Rice Grain Reserves of all the kingdoms finished…

Eventually the king had to hand over his entire kingdom to this clever person. That’s Power of Compounding

Key rules for Investment that enable Compounding

1. Make an early start

Nothing like starting early to make the most of compounding. If you start investing from the time you start earning, it will make for a solid base that will enable your funds to grow further over the course of time.

2. Discipline

If you wish to create a healthy portfolio, it is imperative that you define your priorities and be regular in your investments. Regardless of how less you earn, knowing what your priority is and understanding how being disciplined now would pay off later, will help you develop the habit to keep funds aside for investing.

3. Be patient

A lot of us wish for quick returns not realizing that it is the long-term investments that really powerfully reap from the concept of compounding. You will have to allow your investment to grow at its own pace without meddling with it. Years of dedicated investment on your part will render a strong and healthy lump sum amount for you at the end.