Compound Interest- The 8th wonder of the world (How to use the low-cost approach to extraordinary wealth)

Compound Interest- The 8th wonder of the world (How to use the low-cost approach to extraordinary wealth)

11,029 Comments

25th July 2021

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

The greatest catalyst in creating wealth has already been invented. Most people even know about it, yet most would tend to ignore its mammoth effect on one’s financial life. Compound interest might be the only friend you need in your journey to accumulate wealth.

Don’t trust me, worry not. The examples and data below will make this much clearer and easier to understand.

What is compound interest?

In simple terms, Compound interest is basically the interest that is earned on interest. This “interest on interest” is where the compounding part comes in.

For example: – You invest $1000 at 10% interest, at the end of the year you will have $1100.

 This $1100 at 10% interest at the end of the second year will give you $1210.

So, in the second year your principal=$1000 has earned you interest of $100 + “interest on interest” has earned you $10.

See when this effect is applied to a decent corpus of money, over a good 2 decades or more, you end up with what people like to call generational wealth, the kind of money you pass on to your kids, and so on.

Do not worry, you don’t need to know any kind of formulae or graphs to learn about compound interest. As long as it is working in your favour, that’s all we need.

How do you make compound interest work for you?

A low-cost, simple way to create decent wealth, provided you give compounding its time is exactly what is needed.

Let’s look at an example: –

You pick an index fund as your tool to invest in equities for the below examples. They are low-cost and passively managed (the fund manager’s objective is to stay as close to the performance of an index such as the NIFTY50).

Case 1: – You do a lump sum investment of ₹5,00,000 at a moderate rate of return on your investment of 12% over a period of 20 years.

 

At the end of 20 years, you would have earned close to 50 lakhs at a mere investment of 5 lakhs, while paying very low fee on the index fund.

NOTE: – Something to keep in mind, most people don’t invest for 2 decades or so, when interrupted the compounding process will not be as effective as it can be.

If you had pulled out your money in half the time at the 10-year point, you would have accumulated just 15,52,924 losing out on the compounding effect.

Case 2: – You do a monthly SIP ( low-cost approach to extraordinary wealth) 

Now, this is how you make big money, say, you do a monthly SIP of ₹ 5,000, at a moderate rate of return on your investment of 12% over a period of 20 years.

But here is the catch, instead of investing the same amount, as your income grows so should your investment, you top up your SIP 10% every year.

 

You would have accumulated close to 1crore, ₹92, 18,564 to be exact.

But if you had interrupted the process in the initial years, you would have been left with a whole lot less money to put it simply.

This is the low-cost approach to extraordinary wealth. All it takes is time and the magic of compounding.

Of course, there are capital gain taxes to be considered and the expense that is paid on your mutual fund should also be taken into consideration (in the case of an index fund this is very minimal in the range of 0.1-0.5%).

Summing Up

 The low-cost approach to extraordinary wealth is simple yet effective, anyone can follow this method to get wealthy. But while it may look easy, in practice it doesn’t pan out so.

The limiting factor often ends up being a lack of patience and FOMO, thus interrupting the compounding cycle of wealth.  

11,029 thoughts on “Compound Interest- The 8th wonder of the world (How to use the low-cost approach to extraordinary wealth)”

  2. muss Man online casino gewinne versteuern

    Today, I went to the beach with my kids. I found
    a sea shell and gave it to my 4 year old daughter and said “You can hear the ocean if you put this to your ear.” She placed the shell to her ear and
    screamed. There was a hermit crab inside and it pinched her ear.

    She never wants to go back! LoL I know this is totally off topic but I had to
    tell someone!

    Feel free to visit my site muss Man online casino gewinne versteuern

    Reply
  5. Duane

    great submit, very informative. I’m wondering why the opposite experts of this sector do not understand this.
    You must proceed your writing. I am sure, you have
    a huge readers’ base already!

    Also visit my homepage :: holland casino blackjack uitleg (Duane)

    Reply
  6. Edmund

    What’s up Dear, are you truly visiting this web page daily, if so
    afterward you will absolutely obtain fastidious know-how.

    Here is my blog: viel geld im casino verloren [Edmund]

    Reply
  8. Regiotime-hechingen.de

    Hey there this is somewhat of off topic but I was wondering if blogs use WYSIWYG editors or if you have to manually code with HTML.
    I’m starting a blog soon but have no coding knowledge so I wanted to get advice from someone with experience.
    Any help would be greatly appreciated!

    Visit my web-site; Regiotime-hechingen.de

    Reply
  9. Mitzi

    best gambling website canada, latest no deposit casino bonuses
    usa and online gambling poker australia, or neteller casinos uk

    my web site: craps dice roll simulator (Mitzi)

    Reply
  10. Quentin

    pokies return rate canada, best united kingdom online seating at palms crown casino
    (Quentin) slots and
    where can i play poker online for real money in australia, or top usa online poker sites

    Reply
  14. Madie

    canada visa slots, new united states based onine gsn grand casino champagne [Madie] and bet365 play
    new zealandn roulette online uk, or free united statesn roulette simulator

    Reply
  16. Nila

    gambling online in usa, 888 casino canada promo code and
    pokies free online canada, or united kingdom roulette betting strategy

    Here is my webpage :: bingo field navy – Nila,

    Reply
  21. Kelle

    united kingdom online slots casino, slot machines canada for sale and casino chip values usa,
    or montreal australia casino

    Also visit my web site :: is trading similar to
    gambling (Kelle)

    Reply
  28. Betty

    united statesn casino no deposit free spins, united kingdom roulette for mobile
    phones and safest online casino in australia, or best can i get money back
    from online casino (Betty) gambling apps uk

    Reply
  31. Jenny

    statistics of gambling in canada, free 50 pokies no deposit sign up bonus
    united kingdom and legal gambling in united states,
    or free online games win real money no deposit usa

    My website – blackjack casino how to play; Jenny,

    Reply
  61. RichardMow

    [url=https://cephalexin.company/]buy keftab[/url] [url=https://cytotec.business/]buy cytotec 200 mg online[/url] [url=https://antabuse.sbs/]disulfiram purchase[/url] [url=https://cheapcialisdrugstore.monster/]tadalafil india buy[/url] [url=https://modafinilztab.com/]modafinil europe buy[/url]

    Reply
  210. WilliamWails

    [url=https://onlinecialispillwithnorx.monster/]cialis 5mg cost[/url] [url=https://onlinedrugstore.company/]canadapharmacy24h[/url] [url=https://tizanidine.email/]zanaflex 16 mg[/url] [url=https://orderviagra50tablet.quest/]viagra generic europe[/url] [url=https://buyviagra200tablets.quest/]buy viagra online free shipping[/url] [url=https://lexapro.life/]lexapro 40 mg[/url] [url=https://celexa.agency/]citalopram nz[/url]

    Reply
  353. ZakMen

    [url=https://genericviagra200mgbestprice.quest/]where can i buy viagra online in canada[/url] [url=https://tretinoin.agency/]retin-a 0.05 cream[/url] [url=https://orderdiflucan.online/]canadian pharmacy diflucan[/url] [url=https://ordercialis10noprescription.monster/]tadalafil online cost[/url] [url=https://lisinopril.network/]lisinopril 3973[/url] [url=https://albendazole.company/]albenza albendazole[/url] [url=https://cialis5mgpills.quest/]5mg tadalafil generic[/url] [url=https://buyviagratabletswithnorx.quest/]generic viagra 100mg best price[/url]

    Reply