Time is the essence of life. It is the prime advantage that young people have when it comes to planning for their financial freedom and overall stability. When it comes to wealth creation via investment the amount of time one stays invested in is of principal importance. The sooner you start, larger the corpus you can accumulate.
We understand that rate of return also plays a very important role in accelerating the impact of compounding on your investments. But when we talk about power of compounding, we normally refer to the duration of the investment.
Let’s understand this first principle of wealth creation with the help of an example:
| Investor Name | (Rs. 000) Per Year | Start Age | End Page | Investment Term | (Rs. 000) Total Investment | Portfolio Value* | Growth |
| Ms. Geeta | 50 | 18 | 28 | 10 | 500 | 52.60 Lakhs 11x | 11x |
| Ms. Sita | 50 | 28 | 58 | 30 | 1,500 | 47.20 Lakhs | 3x |
** Growth rate assumed to be at 7% per annum. *Approximately rounded off.
From the above example we can observe that Sita has invested thrice as much as Geeta but Geeta stayed invested for 40 years & Sita for 30 years. With this delay of 10 years by Sita in starting her investments ,when both Geeta & Sita retire at the age 58 , Geeta has approx 7 times larger accumulated corpus than Sita. This difference of 7 times was with a lower risk asset class like fixed deposit, this difference could have been wider with higher rate of return.
This is because of the snowballing effect of compound interest wherein the interest on your investment earns interest. Power of compounding is so impactful that even with a longer investment term of 30 years & also 3 times more capital investment as compared to Geeta, Sita’s retirement corpus could not even be at par with that of Geeta’s.
Conclusion
Investing is a term most people think about after their 30s but compound interest significantly favors individuals who start early. The distinct advantage is value of time. Thus we stay the younger you are – richer you can be. The amount may be miniscule, but it is pertinent to start investing early, be consistent and let the power of compounding show its magic.
Remember, creating wealth is not about timing the market, but time in the market. The longer you stay invested, larger the corpus can be created.
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