The Magical Power of Compounding:

It is your most powerful tool for creating financial independence by accumulating wealth slowly, safely and surely.

There are no short cuts to riches. But every investor, however small his savings is, can travel on, safely and surely in a vehicle, on a road that lets him accumulate wealth over time is run by a powerful engine called “compounding”.

Compounding is a simple concept that offers astounding returns. if you park your money in an investment with a given return, and then reinvest those earnings as you receive them, your investment grows exponentially over time. With simple interest, you earn interest only on the principal (that is, the amount you initially invested); with compounding, you earn interest on the principal and additionally earn interest on the interest. In other words, it’s a way of making your money work harder for you, and is perhaps the most powerful tool that an average investor can use to plan for many of life’s financial goals, including retirement.

Say we invest Rs 100/- @ 10% p.a. for three years. Then
After one year we have Rs. 100/- + 10% of Rs.100/- = Rs.110/-

After two years we have Rs.110/- +0.1*110= Rs.121/- and

After three years we have Rs.121/- +0.1*121 = Rs.133.1

i.e., average rate of return of (133.1-100)/3 = 33.1/3=11.03% instead of 10% simple rate of interest or approx. 1.03 % p.a higher return if invested on compounding basis.

HOW LONG TO DOUBLE YOUR MONEY?

The Rule of 72 tells you how long it will take.

If you study the compound-interest table for any rate of interest, you will find that by multiplying the number of years at which Rs 1.00 becomes Rs 2.00 by that rate of interest, the result is always approximately 72. (If you were to calculate the point mathematically using years and fractions of years, it would be precisely 72.)Knowing this trick, called the Rule of 72, you can quickly estimate the number of years it will take to double an investment -- or the rate at which your investment must grow in order to double within a stated number of years.To find the number of years, simply divide 72 by the rate. Or, to find the rate at which your investment must grow in order to double in a specified number of years, divide 72 by the number of years.

72
---------------------- =No of years
(Interest Rate)

or

72
----------------- = Interest Rate
(No of years)

Thus, if an investment is growing at a rate of 9% a year, it will double in value in 8 years.

Similarly, if you want to double your money in 4 years, you must invest it at 18%.

If you want your money to double in 3 years, you must invest it at 24%.

Similarly at 36% your money will double in 2 years.