Albert Einstein once famously said,
“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.”
Such is the power of compounding. But what is so great about “compounding” that arguably the greatest scientist of all time, called it the eighth wonder of the world? Is it really that big a thing? Let’s try to figure out.
Let’s say, I am a 30 year old who has saved Rs 2,50,000 after having worked for 5-6 years after getting my first job . I put away this money for my retirement at the age of 60. I do not save a single penny after this and spend whatever I earn from the age of 30 till the time I retire i.e. 60. Can I afford to retire at 60? What do you think?
If I was a smart man and had invested this money somewhere (stocks, mutual funds etc.) which earned an annual rate of return of 25% p.a. for the next 30 years, do you have any idea regarding what amount of corpus I would have, by putting away my first 5-6 years of savings? Can you guess? If you guessed 25L or 50L or 75L or even 1 Crore, you are nowhere near the actual amount!
Make a note of this and write this down somewhere so that you don’t ever forget this for the rest of your life! An amount of Rs 2,50,000 put away for a period of 30 years, earning a compound interest of 25% p.a. would lead to a corpus of Rs 41.84 Crores!! Yes, you heard it right! Now, let’s say that you retire by 65 instead of 60 and allow this amount to compound for another 5 years.
Due to massive compounding going on now, your corpus would become Rs 144 Crores (have a glass of water!) a the age of 65. Unbelievable isn’t it? How many 65 year olds do you personally know, who have a corpus/estate of Rs 144 crores today? I don’t know many such guys! Now, do you believe that compounding is the eighth wonder of the world? I do and will always remember this for the rest of my life!
There is still time! With medical advancements, it is expected that the average life span of an Indian will soon become 80-90 years. If you want to live independently and in a dignified manner when you become old, just put away a little amount of money today and do not touch it till you retire! You will be amazed at how comfortable and wonderful your golden years of retirement will be.