Let us expand the concept of compounding and the rule of 72 further:

If we observe the rule closely, we can see that it has only three variables, i.e.,

1. Time period in years;
2. Interest rate or the rate of return on the investment and
3. The Principal sum invested.

Now let us see how we can exploit this rule to our advantage for the purpose of wealth accumulation.

Let us first fix the interest rate at 26% and see what happens to our one time investment of Rs.1000/- if invested for a period of say 10, 20, 30 and 40 years. Then,

Value of Rs 1000/- , after 10 years will be Rs.10, 000/-
Value of Rs 1000/- , after 20 years will be Rs.1, 02,000/-
Value of Rs 1000/- , after 30 years will be Rs.10, 26,000/-
Value of Rs 1000/- , after 40 years will be Rs.1, 03, 47,000/-

Moral of the story is:

1. The longer the time period the better: Compounding rewards disciplined investing and works best over long tenures. In the above example, the first 30 years yield just Rs 10, 25,000/- lakh. The last 10 years show the money multiplier effect of the power of compounding yielding a massive Rs 93,21,000/-. The longer you leave your money untouched, the faster and bigger it grows. For instance, stretching the above investment pattern to 40 years will give you Rs 1.0346 Cr.

2. The earlier, the better: The earlier you begin investing, the greater your gain from the merits of compounding.

For instance, if you begin an investment plan at age 20 and invest Rs 1,000/- @ 26% p.a.until you’re 60, you’ll get Rs 1.03.47/- Cr on a total investment of Rs 1,000/-.

On the other hand, your colleague who begins saving at age 30 and invests Rs 1,000/- will only get Rs 10.26 lakh on a total investment of Rs 1000/-.

That is, by allowing your money to compound longer, you can be richer than your colleague by Rs 93.21 lakh, although both of you saved the same amount of Rs 1000/-.

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Thus, time is one big factor in accumulating the wealth and which is controllable and in the hands of every investor. One has to start investing from the day one when he starts earning his or her first salary cheque.

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