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Compounding : 8th wonder of the world !!!

“Compounding is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

Compounding appears like magic but a little more awareness can help you get to the root of it. Compounding works like a snow ball falling down the hill. Initially amount of force and energy to create a snowball must be very high. However, as it rolls down the hill, snow ball will pick up more snow, gaining more mass and surface area and become very big snow ball till the time it reaches end of the hill.

Ask Warren Buffett for the single most powerful factor behind his investing success, and he’d respond “compound interest” — without skipping a beat. Compounding plays a major role for wealth creation in long run. The work you need to do in the beginning is often more. But once your wealth snowball is built, then your wealth naturally attracts more wealth. Compounding can create millionaires from average people. For using compounding as a tool, one does not require one to be a financial expert, but has to only ensure that funds are invested in asset which is growing steady in long-run.

Compounding is very powerful owing to the fact that return earned is converted to capital and again invested so total capital invested keeps increasing. As the total capital invested increases, so does the return for future periods. Equity as an asset class has provided the greatest return when calculated in terms of CAGR (Compound Annual Growth Rates) for longer periods of investment horizon. Equity may tend to be volatile and irregular in shorter horizon but in longer duration it is the best return generator for investors. No other asset class like real estate,fixed income instruments,commodities etc. have been able to meet returns generated by Equity.

A Small Story on power of Compounding :

There’s a famous legend about the origin of chess that goes like this.

When the inventor of the game showed it to the emperor of India, the emperor was so impressed by the new game, that he said to the man

“Name your reward!”

The man responded,

“Oh emperor, my wishes are simple. I only wish for this.

Give me one grain of rice for the first square of the chessboard, two grains for the next square, four for the next, eight for the next and so on for all 64 squares, with each square having double the number of grains as the square before.”

The emperor agreed, amazed that the man had asked for such a small reward – or so he thought. After a week, his treasurer came back and informed him that the reward would add up to an astronomical sum, far greater than all the rice that could conceivably be produced in many many centuries !!!

Acting rationally, consistently, while harnessing the power of compound interest over a very long period of time is what has made Warren Buffett perhaps the most successful investor of all time. Why not harness it for yourself? Start early and think long term.

Thank you !! 🙂

Contrary to most advice here.

Forget about saving your money.

Instead, I would recommend you start investing as soon as you can. No matter how little or how much money you have now.

Let’s say you are 15 years old at the moment, and that you commit to investing $1,000 every year.

That’s close to nothing. It’s just upwards of $80/month.

And you do that for the next 50 years at a 10% return annually.

Guess how much you would have in your investment account when you are 65 years old.

USD$1,280,299

Let that sink for a moment.

That’s almost 1.3 Million Dollars.

You were able to turn $50,000 ($1,000/year * 50 years) of your own money into well over a Million USD.

How’s that possible?

Thanks to compound interest.

The more time you have, the more compound interest can help you grow your money.

But if you wait until you are older to start to invest… you might not be able to benefit from such exponential growth.

Let’s say you wait until you are 25 years old to start investing instead of starting at fifteen.

Who cares? You are still starting at a young age. In fact, you are starting off before many Americans do.

You decide to put in the same $1,000 a year for the next 40 years (until you reach 65) and get the same 10% return.

Guess how much your investment account would be worth after those 40 years.

USD$ 486,852

That’s about 2/3 less than if you started at 15.

Are you now convinced that you need to start investing as early as you can?

Great!

So what’s the best way for you to start investing?

In my opinion, by opening a ROTH IRA account.

A Roth IRA isn’t a type of investment in itself, but it’s an account for holding your investments.

Just like in a brokerage account, in a ROTH IRA account, you can pick where you want to invest your money.

You can buy anything from stocks to bonds, to mutual funds.

But the main benefit of a ROTH IRA is that you have to pay ZERO TAXES on any money you make from your investments.

To be exempt of the capital gains tax, the only thing you would have to do is wait until you are over the age of 59 1/2 to withdraw your gains.

If you wish to withdraw them earlier, you would be subject to pay taxes on your gains, just as you would do in a regular brokerage account.

As of 2019, you are allowed to contribute up to $6,000 of after-tax money every year to your ROTH IRA, as long as that money comes from earned income (not gifts).

Now let’s switch our first example and work with those numbers.

Imagine can put $6,000 every year into a ROTH IRA from age 15 until you are 65, and that money grows at 10% every year.

If you can do that, your account would grow to USD 7,681,796 over those 50 years.

And ALL of that money is TAX-FREE, you have to pay ABSOLUTELY NOTHING on taxes once you withdraw it.

Does that sound too good to be true? Does it sound like a scam?

Well, let me be the bearer of good news.

It’s REAL, and it’s not a scam.

You can check the IRS website and read on about it for yourself: Roth IRAs | Internal Revenue Service

So how do you open and set up your ROTH IRA?

If you are over the age of 18, most investment brokerage companies will allow you to open a ROTH IRA on your own. Just do your research online, find the best that suits you and create your account online.

If you are younger than 15, some investment brokerage companies will allow your parents to open a CUSTODIAL ROTH IRA for you.

In this type of account, your parents or guardians will have to make the actual trades for you, and they will retain management control over the account.

However, you can be part of the investment process. You can create a portfolio allocation and select asset classes and even specific investments.

And once you reach the legal age in your state, the account’s ownership will convert to you.

If you are curious about how custodial ROTH IRA’s work or if you want to learn other ways to start investing as a teenager, I suggest you watch the video I created this week.

It’s like investing 101 form teenagers.

You can watch the video here

Let me know in the comments below if you knew about Custodial Roth Ira’s and make sure you share this answer or the video with a young person who might need to read this.

Thanks for reading!

My answer will be based on the presumption that the investor already has a permanent residence.

Invest to earn and earn to invest – A powerful statement in the field of investing.

“Gold and Real Estate has been the sought after investment options for most of the Indians since ages due to faith of assured price appreciation”.

The above philosophy is changing, nowadays Indians are looking for new avenues to compound or build their wealth or maybe park their money in some types of instruments which can provide them a good compounding return after a certain period of time.

The best asset class to invest these days is the stock markets directly or via the mutual fund route.

People in our country are still shy and conservative about investing in the stock markets.

This map shows the exhaustive data about the retail participants in the Indian Capital Markets. This is bound to increase in the coming years as a lot of retail participation is increasing and people want to be a part of the country’s growth story by investing in stocks and growing their wealth.

Key Benefits in Equity Investments

* You can diversify your risks by investing in various avenues

* Potential to earn relatively high returns

* High liquidity

* Investors can start with amounts as less as Rs. 1000 (for mutual funds)

* Money is handled by professional fund managers (for mutual funds)

* Efficient post-tax returns

* Long term capital gains (over 1 year) are tax exempt

The above exhibit clearly indicates that over a period of time equities have outperformed real estate by a big margin.

Equity success story:-

An investment of Rs 10,000 in the Symphony (manufacturer of air coolers) stock in December 2006 would have become Rs 90.77 lakh today; a 3-BHK flat!

That’s an whooping 90000% or 900x on ROI.

I bet, no property even in emerging pockets in the country would have matched even half the returns that Symphony delivered in last 10–11 years.

There are many more examples such as Eicher Motors, Hero Motor Corp, HDFC Bank, Bajaj Finance, Ajanta Pharma, DFM foods, Caplin Point etc.

Shares of good companies will give u dividends too. Which if calculated will escalate their current return percentages.

The property market is saturated with huge unsold inventories whereas the equity markets have been consistently delivering returns if the right techniques and approaches are followed.

So if someone is ready to invest try picking up quality stocks, grab some good mutual funds (start a SIP) and sit and enjoy your wealth multiply.

If someone is novice try consulting a Financial Planner and also don’t get swayed by the euphoria of investing and getting rich be an conservative investor initially and allocate the assets wisely.

Stay Invested Stay Rich.

Cheers !!

Ever wondered why rich people get richer and poor people remain poor?

This question is actually the answer.

The rich earn money through money while the poor work their ass off for it.

Coming to question, I will not share those disgusting coupon or promotion schemes or those in which you form a chain where you get paid whenever someone new enters that chain below you.

NO!

I will share with you an idea!

It involves, buying something at a price. When that “something” gets a hike in price, sell it.

That something can be

• Bitcoin
• A stock
• Real estate property
• Any good or commodity

If you look around and observe, most of the businesses run on this idea.

The shop from where you purchase your daily items also runs on this same idea, you buy something that costs higher than what the shopkeeper has paid for it!

The difference in this price is the income of shopkeeper.

Then the question arises

Is it that simple?

Are there any similar ways?

Well, it’s the next level.

What if I tell you that you won’t even have to wait for customers and handle all those inventories due to constant buying and selling.

The answer is, A Stock.

Instead of figuring out promo codes and discount coupons, we can brainstorm and observe all that is happening around us and make money at every damn opportunity.

HOW?

To be honest, there isn’t enough space for everyone to open a company and run it successfully, what if I tell you that you can be a part of that company which is running successfully.

And that is by buying its share!

Let me give you an example of brainstorming

1. I look around, what do I see? A wall maybe
2. Okay my room needs some renovation
3. Wall needs to be painted
4. Oooh! Paint, we need to have whitewash every 2–3 years ( I hate it because every time it happens, my valuable items go missing anyways)
5. I can say that paint industry will survive for quite some time, let me check some good companies that manufacture paints

What do I see?

Asian Paints, I have grown up listening to this company.

Watching its advertisements, let’s look at the share price

What else do I see?

Kansai Nerolac

Why is it better?

• Slightly lower PE ratio (Lower priced)
• Best part, ZERO DEBT

Once I feel that this may be better, let’s have a look at its price!

Whooaa!

Price increased more rapidly ( faster growing)

That said, I have found myself something worth purchasing!

WHAT NOW?

Sit back and relax. Wait for its price to double, triple, quadruple and sell it anytime you wish.

That’s how big investors earn money.

Shareholders can quiz management over the performance of stock and upcoming strategies taken up by them LIKE A BOSS!

I hope all this made sense and you realize that there are no shortcuts as such to get rich as fuck (rhyme intended)

All that I have discussed needs patience and emotional control 🙂

Thank you for reading, you can follow me for more similar answers :)56.5K viewsView