Albert Einstein considered compound interest to be the 8th wonder of the world.

Albert Einstein considered compound interest to be the 8^th wonder of the world. In this video, we will understand the Power of Compounding.

Basically the term compounding means that interest earned by you is clubbed along with the principal amount and reinvested. It is compounding that grows the invested amount manifold over a period of time.

Suppose you invests a principal amount of Rs. 5,00,000 and earn interest @ 10%, which is Rs. 50,000 as interest in the first year. So your investment amount in the next year will be the Principal Amount + the interest earned = Rs (5,00,000 + 50,000) = Rs. 5,50,000/-, so on and so forth.

The various avenues to invest that will help us take advantage of the power of compounding are shares, mutual funds, bond etc.

The Power of Compounding works on 2 basic premises:-

1. Reinvestment of earnings
2. Time period

We have discussed reinvestment of earnings before and now we will understand the importance of time here.

Compounding works wonders in the latter stages of investment. Since one keeps getting interest on interest, the accumulated earnings tends to be humongous.

The formula to calculate compound interest is:

A = P (1 + [ r / n ]) ^ nt

Where A is the amount earned, P = principal amount invested, r = annual rate of return, n = number of compounding period in an year, t = time in years over which money gets compounded.

Alternatively, we can also calculate this in excel sheet with the formula.

So if you invest a principal amount of Rs. 5000 and earn interest @ 12% per year for 10 years, then the future value of money will be A=FV(rate,nper,pmt,pv,type)

Present value	5000
Rate	12%
Term	10
Compounding periods in a year	12
	Rs. 11,61,695

Also, if you go for longer duration in the above case, say 30 years, the future value will be

Present value	5000
Rate	12%
Term	30
Compounding periods in a year	12
	Rs. 1,76,49,569

So in this way the power of compounding works wonders in the long run.

So what makes compounding powerful is:

1. How frequently does compounding takes place such as daily, weekly, monthly or so on.
2. The duration of time you keep your money locked-in. The longer the duration, the higher are the returns.

All the legendary investors of the world have reaped in the benefits of compounding for instance Warren Buffet has created his wealth in stocks like Gillette and Coca Cola.

There are enough advocates of the compounding principle and how it can create wonders for one’s wealth. One needs to start investing as soon as one starts earning. Some great investors have managed to do the same starting with their pocket money while in their college days. Sitting tight after investing is one of the characteristics that very few people possess and it is these people who reap in the benefits of compounding.

Thank you for watching the video.