Compounding is the 8th Wonder of the World (magic to make money)
Whenever a scientist like Albert Einstein calls a concept the “8th wonder of the world”, there is something special about it and that is about compounding. You may have studied compound interest in school, but you understand its real magic only when you use it in real life especially in investments and wealth creation.
Let us understand step by step in this blog what is compounding, how it works, and why it is the simplest and most powerful tool to make you rich.
What is compounding ?
In simple words, compounding means earning interest on interest. When you invest any amount, the interest you get on it is added to your original investment and next year you get interest on that increased amount, this is compounding.
Mathematical Formula :-
A = P(1 + r/n)^(nt)
Here A = final amount, P = principal, r = interest rate, t = time (years), n = times interest is compounded per year
But let’s keep it simple and practical because compounding is not just a formula, it is a mindset.
A short story on the magic of compounding
Think you have two options :-
1. You get ₹1 lakh every day for 30 days
2. You are given ₹1 and it doubles every day (₹1, ₹2, ₹4, ₹8, …)
Most people will choose the first option because he is giving ₹30 lakh without thinking. But if you choose the second option, then after 30 days you will have more than ₹53 crore.
This is the magic of compounding.
The Core Power of Compounding is Time and Discipline
The magic of compounding works only when you use both time and patience appropriately.
The more time, the more powerful
Compounding is a slow process. Nothing special is visible in the beginning but as time passes, compounding takes off like a rocket. Therefore, the sooner you start, the more benefit you will get.
Example:
1 You invest ₹5,000 per month at the age of 25 @12% annual return
2 Your friend starts at the age of 35, investing the same ₹5,000 per month at the same return
When you both turn 60
1 Your amount will be ₹2.75 crore+
2 His will be ₹0.95 crore
By starting just 10 years late, there is a loss of almost ₹1.8 crore!
Invest regularly with discipline, even if it is small
Compounding works not only on big money but also on regular and consistent investments. If you invest even ₹500 every month, it becomes a big amount at one point.
Real Life Use of Compounding
Mutual Funds (SIP)
Systematic Investment Plan (SIP) is the best way to use compounding. You invest a fixed amount every month, and that interest earns + that interest also earns interest.
Fixed Deposits (FDs)
Compounding also happens in bank funds, especially if you choose reinvestment options.
Stock Market (Long Term Investing)
If you invest in quality stocks for the long term, compounding can give you exponential returns.
Knowledge & Skills
Compounding is not just limited to money. When you learn a little bit every day, your knowledge also compounds. Today’s 1% improvement can become tomorrow’s 100x growth.
Why don't people take advantage of compounding?
- People want quick results : Compounding is slow but it is a sure shot.
- Lack of financial discipline : People invest, but not regularly.
- Consumption over saving : Most people believe in spending money, not investing it.
- Short term thinking : People do not do long term planning.
Solution ?
You will have to change your way of thinking a little. The real power of compounding is seen only when you commit for the long term
Power of Delay
If you invest ₹1 lakh @12% annual return:
Year Amount
10 ₹3.10 lakh
20 ₹9.64 lakh
30 ₹29.96 lakh
40 ₹93.05 lakh
See ?
Most growth happens in the last 10 years. So don’t delay, remember the rule of “Start Early, Stay Invested”.
Tips To Use Compounding Powerfully
- Start early – Even if the amount is small.
- Make it regular – SIP is the best way.
- Reinvest – Do not withdraw returns.
- Be patient – Do not get worried by short-term volatility.
- Avoid breaks – Even a single missed month has a big impact in the long term.
Compounding in Life
- Health – A 30 minute walk every day is a small thing today, but after 10 years you will be fit and healthy.
- Relationships – A little time with family every day compounds trust and bonding.
- Habits – A small good habit (like early waking, reading) can be life-changing in the long run.
Conclusion
Compounding is a silent worker. It seems boring in the beginning, but can give you financial freedom in the long term. The problem is that people underestimate it. But those who understand this concept, they see extraordinary growth in life.
So, if you really want to make money, build wealth, or improve your life, then understand compounding, use it and have faith in it. If you need any help I can help you in this journey of making wealth and you can contact me on my Number +919830779531