Compounding: Are you investing for the first time and want to know how your money can grow over time? “Compounding” is a great concept that can multiply your investment manifold.
It is like a magic where your money not only earns on its own, but also earns more money from that earning. Let’s know the 5 important rules of compounding, which you should not miss at all.
What does compounding mean?
Compounding is the process of getting returns on your money, and that return also starts generating more returns with time. Let’s know 5 things related to it.
It is important to understand the role of time.
The longer you stay invested, the more powerful compounding becomes. Even small amounts can become a large amount if left untouched for many years.
Reinvestment is important
For compounding to work, you should reinvest your earnings, such as dividends, interest, or capital gains, rather than withdrawing them.
Increase by some amount every year.
With each passing year, your earnings increase by some amount. You also need to keep increasing your investment a little every year, so that you have a large corpus by the time you retire.
Delay is less beneficial
Starting late gives less time for your money to grow. Starting early, even with a small amount, gives more years for compounding to work in your favour.