The power of compounding
Let us start from the beginning, when was the first time you heard about compound interest? In middle school right? Same here! Studying in an Indian school the formula we were told was amount = principal ( 1 + r/100) to the power t. Where the amount is the return we get, the principal is the sum invested, r being the rate of interest and t being the time the money was invested for.
From here tell me, what according to you is the most important thing when compound interest is concerned? It’s patience, my friend. Let me explain how!
So for example,
You and your friend, let’s call him Jack. So you and jack both invested a sum of 100,000 dollars in a stock which gives you an annual return of 15%. So after the first year, both of you get a return of 15,000 dollars, but unlike you, Jack is not that smart, he withdraws the 15,000 dollars he earned to buy a gaming pc to play Fortnite. But you do not and you keep your 15,000 dollars invested. The next year both of you get a return of 15% on your invested money which is 100,000 dollars for Jack and 115,000 dollars for you. So at the end of the year, you make 17,250 dollars and Jack makes only 15,000 dollars. Now the total money you have is 132,250 dollars and the total money Jack has is 115,000 dollars, and Jack withdraws those 15,000 dollars too. Fast forward 10 years, you keep your money invested and Jack keeps withdrawing his money. Now, this might shock you,
After 10 years, your invested money is worth more than 400,000 dollars and Jack’s money is still worth 100,000 dollars because he keeps on withdrawing the money he makes.
Now let me remind you, both of you had the same principal amount, invested at the same rate of interest. It is just that you kept your money invested for a longer time without touching it and Jack even though his money was invested for 10 years, same as you, kept on withdrawing the money he made, creating a difference of more than 300,000 dollars, more than thrice the amount invested. That’s why patience is so so important.
Now I will tell you what I have done as a 16-year-old, and how I am making the most out of compound interest. Last month, when I got to know about this immense power of compound interest, I gave my dad all the little pocket money I had saved up and told him to invest it for me in an index fund. I have no intention of withdrawing the money before I am 50 years old and plan to retire.
Now let me paint a clear picture for you, for example, I had invested only 2,000 dollars at 16 years of age and I withdraw the money when I am 50 years old, with a return of only 12% per annum I will have more than 94,000 dollars. That my friends is the power of compounding. Thank you for joining me today, I hope you have a great day! This is me, Taksh Goel, signing off and I will catch you guys super soon.
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