What is the power of compounding?

Mathematically, compounding is defined as "the increase in the value of an investment as a result of interest earned on the principal and interest accrued". Put simply, it's a strategy that makes your money work for you. It could be considered as a powerful tool to increase your wealth. You can use the power of compounding to plan for future goals like retirement.Simple compounding means you earn interest on your capital. But with compound interest, you earn interest on the principal balance plus the  interest accrued over consecutive periods. Over time, this interest adds up to a significant amount. 

Here's a hypothetical example to highlight the power of compounding. Both Vijay and Geeta are each investing Rs 50,000  in an investment opportunity that offers an annual interest rate of 10% for 10 years.While Vijay opts for simple interest, Geeta opts for compound interest (read: reinvest). At the end of 10 years, Vijay would receive a total capital of Rs 1 lakh. On the other hand, Geeta would receive a capital of Rs 30 lakh. .This is because in  the case of Vijay, interest was  only charged on the initial principal amount of Rs 50,000. But in Geeta's case, the interest earned each year was added to the principal to calculate  interest for the following year. your profits big time. 

Benefits of the power of compounding

One of the biggest benefits  investors  appreciate about the power of compound interest is time value. Over time, you can earn returns, and  returns from those returns can lead to even more returns. So it helps to increase your investments quickly. It's a good thing to save money and earn an amount of interest that's compounded every year. But what if you invested a fixed amount every month? This small act could increase your returns over time.Let's find out how this is possible. If you invest regularly  over time, your returns can add up much faster. It's important to start saving and investing from a young age. And if you do this regularly over a long period of time, you have the opportunity to maximize your returns and reap the full power of compounding. Many people mistakenly assume that they can't start investing until they have large sums of money.So they postpone investing until they are in their mid-40s. That's not a good investment strategy. On the other hand, if you start investing early, it doesn't matter how much you can invest. Even if you invest small amounts of money on a regular basis, you can expect to build up a substantial corpus over time.