A=Px(1+r)^n

Do you recollect this formula? May be yes. Most of us are aware of this formula. Many may have solved mathematical questions using this formula. But very few have understood the true implication of this in the real world. Rarest of rare are those who have applied this equation in their life.

This is the formula of compound interest. Einstein has said that compounding is the eighth wonder of the world. We all know that compounding increases investment value faster compared to the simple interest. But the rate at which it increases is beyond our imagination. The human brain is wired to comprehend linearity. It is difficult for us to fathom the exponential function.

The other human behavior is our inability to see far into the future. We call this trait “vision”. We are mostly concerned about the short-term objectives and tend to lose our focus from the long term. This is true with most aspects of life. We all love instant gratification as if there is no tomorrow. We are rarely willing to wait. Hence, when it comes to investing, we are almost always obsessed with this factor “r” which is the rate of return. We never focus on the factor “n” which is the number of years. And that is where we lose the entire plot.

Let me explain this power of compounding with two examples. With the first one, you may feel you have missed the bus and with the second, you now have the opportunity to correct that mistake.

1. Gloomy past:-

When you had started your career, let us say at the age of 25, and continued your investment of just Rs. 10 K per month with 10% annual top up, see where you would have reached today:-

SIP with 10% annual top up (Rs)	Holding period (n) (Yrs)	Amount at age 50 Yrs (Rs)
10 K	25	​4.27 Cr

Wasn’t that easily possible, feasible, and doable? Surely it was. But many did not comprehend the power of exponential and neglected the factor “ n.” They were just not aware about this magic.

However, let us not fret about this missed bus. You are still not too late. You have ten more years of working life ahead. Even if you start now, with say Rs 50 K per month and hold on for the next 10 years, you will create enough wealth for yourself and your family.

SIP with 10% annual top up (Rs)	Holding period (n) (Yrs)	Amount At age 60 Yrs (Rs)
​50 K	​10	​1.68 Cr

2. Bright future:-

If you think you could not do justice to this miracle of compounding due to a lack of awareness, at least ensure that your children reap this benefit. In my previous seminar, I gave a checklist for young children to achieve financial freedom at the age of forty-five.

These days many children are earning handsome salaries, and hence they can invest more than what we could. Let us say at the age of 25, your child started investment of Rs. 50 K per month with 10% annual top-up and continued for next 35 years:-

SIP with 10% annual top up (Rs)	Holding period (n) (Yrs)	Amount At age 60 Yrs (Rs)
​50 K	​35	88.83 Cr

I know that you are stunned after reading this astronomical amount. Isn’t it? Everyone will. But believe me, it is easily achievable. This is the miracle of the exponential factor. This is the power of compounding. I have been continuously emphasizing the aspect of behavioral finance in almost every article. Let me reiterate again, the key is not how much you invest, and where you invest, but the key is how you behave with your investment. That’s what matters!!!

I am sure this wisdom will definitely help your children to achieve financial freedom. So, what are you waiting for? Go ahead and catch the bus before you miss it again.

The wise old man, Charlie Munger said,

“The big money is not in the buying and selling …

but in the waiting.”