Understanding how compounding works can make us very wealthy !

To understand how compounding works, we need to learn the rule of 72.

The rule of 72 is used to find how many years it would take to double our money.

Rule of 72 = 72 / Investment return per year

For example, if our investment gives 7.2% return per year, it would take 10 years to double our money ( 72 / 7.2 = 10).

Now, let's say we had invested the money for 40 years at 7.2% return.

In 40 years, it would have doubled 4 times ( 40/10 = 4).

So, it is now clear that if we invest some money at 7.2% return per year, it would double 4 times in 40 years.

4 doubles is equal to 16 times the original invested money ( 2 to the power of 4; 2*2*2*2 )

Which means 10 lakhs invested at 7.2% rate will become 1.6 Cr in 40 years ( 10,00,000 * 16 ).

Hope you are still with me. Because we need to eat the carrot first , before getting to eat the dessert.

Now comes the interesting part.

If we get 12% return instead of 7.2%, how much corpus will we get after 40 years ??

Rule of 72 says, money will double in 6 years at 12% return.

So, in 40 years, it would double 6.7 times (40/6 = 6.7).

6.7 doubles in 40 years is nothing but 104 times the initial amount ( 2 to the power of 6.7 = 104).

Which means, the corpus amount will be 10.4 Cr. ( 104 * 10,00,000).

In 40 years, 10 lakhs invested will become

* 1.6 Cr at 7.2% rate

* 10.4 Cr at 12% rate

* 33.8 Cr at 15% rate

* 47.7 Cr at 16% rate.

Hope you don't have the headache yet.

If the Gods are kind, most of us will get to live till the age of 75-80.

The disciplined ones will start investing in a structured way, at least from the age of 30.

When we have 50 years to invest, even 1% difference in return will create a huge difference in the wealth created.

We can't go very wrong if we just close our eyes and invest in Nifty 500 index.

This alone can take us to the top 1% in the world. Because only 1% of people are worth more than $1m.

So, before investing , please ask one important thing to yourself - How many years it would take to double my money ???

And then start investing early.

Hope you are still with me. If you are, you are definitely destined to be rich soon -)

Building wealth is a simple game of compounding at a good rate for a very long time, and not a game of shooting in the dark and hoping for the best !!!