Use the power of compound interest over a long period of time to become a millionaire
--BY GIRISH LAKHEY
Simply, compound interest is the interest earned from the interest reinvested. Investopedia defines compound interest as "the interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan." If we save and invest Rs 10,000 monthly for a long period of time then we can see the fund grow exponentially. We assume that we can earn 15% return yearly from investing in public companies listed in the Nepal Stock Exchange (NEPSE).
The kind of time that young people have today to compound their investments makes old hedge fund cats salivate. By the time one is 54 years old and has invested for 35 years only Rs 10,000 a month, he/she will have accumulated a total capital of Rs 114,148,439 (more than a million dollars). What the person actually have invested is only Rs 4,200,000 which is only 3.6 % of the total fund accumulated. Rest of the amount is earned from the investment. So to work the magic of compound interest, time plays a very crucial role. Time can be your best friend when it comes to growing your wealth through compounding.
The average salary in Nepal is Rs. 32,374 according to Salary Explorer. So, most of Nepali salary earners can actually follow this strategy and be on the path to becoming a millionaire. However, the question is: Does the investor has enough time, patience and discipline to work the magic of compound interest? Compounding works only when the investor reinvests the interest amount.
Warren Buffet once said, “I always knew I was going to be rich, so I was never in a hurry”. The power of compounding only works well only when the investor is patient and is disciplined. From figure 1 we can see the real magic of compounding after the investor has continuously invested Rs 10,000 every month and has re-invested the interest earned at the end of every year. From the 36th to the 46th year of continuously investing, the fund size increases by about 4 times in the duration of 10 year period. When one is 65 years old, one will accumulate Rs.464, 424,284 (about 6.6 million dollars)
While investing in the shares listed in NEPSE, the investors should choose the stocks which are growing steadily though slowly and that have very less risk. Investing and getting returns from compound interest is actually a slow and a boring process. However, the wealth could compound in a long period until the investors are financially free. If you’ve been reading all the way through, start investing now and get benefitted by the power of compounding.
“Compound interest is the eighth wonder of the world. He, who understands it, earns it ... he who doesn't ... pays it.” ― Albert Einstein
The writer is a student of Finance and Banking at KCM and an intern at Icapital.