In spite of books, blogs, podcasts, etc. telling us about the power of now, we fail to see the point. Another common phrase we hear is ‘Time is money,’ but when it comes to investing, ‘Time creates money.’ Once you have understood this concept, you will not be far from being rich, not just in terms of money but also in terms of your career, health, and purpose. Irrespective of whether time is money or time creates wealth, the bottom line is: time is one of your most significant assets. That’s where the power of compounding comes into play.
Compounding helps your money grow exponentially, but in spite of this, why aren’t more people leveraging the power of compounding?
A major reason why people don’t leverage the compounding effect is that one cannot truly understand it without experiencing it first-hand. The power of compounding is something that is seen over a long period. In the first 10-15 years, you do not even notice the impact of compounding, but then it shoots up like a rocket. Additionally, the earlier you invest, the better your results will be because the longer you stay invested, the more money you make.
For example, an SIP of Rs 10,000 can accumulate to Rs 25,90,689 over ten years (calculated at a 14% rate of interest). A delay by three years can result in a loss of Rs 11,76,931. A delay by a year can cost you Rs 4,48,001 whereas even a delay by a month could make you lose Rs 39,761. Thus, time is a crucial factor in the pool of compounding.
Watch: How To Withdraw PF Online
We all know that Rome was not built in a day. However, when it comes to investing, everyone wants to build Rome in one day, or a few days, or a few years. But that’s just not possible. The only real way for anyone to create wealth is to utilize the power of compounding to his/her advantage. Most people fall into the trap of bypassing the compounding curve by looking for tips, shortcuts (which stock should I buy), Ponzi schemes (unknowingly of course), and end up making costly financial mistakes. But smart investors take it easy and let time create money for them.
Let’s take the case of Mr. Menon, who is now 65-year old. He created a Rs 9-crore portfolio by letting time work for him. He started investing at an early age and invested very little amounts ranging from Rs 100 to Rs 1,000. He never invested more than Rs 25,000 at a time because that is all he could save. So, you can imagine that even by saving modest amounts and letting time create money for him, Mr. Menon achieved this amazing feat. There are many such silent investors that you might never hear about but who have managed to create wealth for themselves and their families by understanding this one simple concept.
Thus, it is crucial to manage money effectively and start when you can. Don’t wait for the right scheme, the right plan, etc., just start with what you have in hand. Investment is an easy game, and we can all be a part of it.
(By Amar Pandit, CFA and Founder, Happyness Factory)