Power of Compounding and How to save more

Power of Compounding & How to Save More...

In this article, I will share with you some common principles to begin in the stock market or anywhere else. They are the power of compounding and how to save more by understanding the power of Money. Setting the foundations right is a must before starting your journey.

I will start with a quote by Steve Jobs:

“Deciding what not to do is as important as deciding what to do.”

The reason why I shared this quote is that many times we spend money on things we don't need or on things which are merely bought to impress others. In order to imbibe the habit of savings, let us understand the power of compounding and the power of money. I will try my best to be simple in my language and concepts.

Let us say, you invest 1000/- in a stock which gives you a decent return of 10% (although many quality stocks give you 15-20% return in the long term). So, by investing 1000/- in a stock with a 10% annual return, you get 1610/- after 5 years. You earn 610/- extra. 😊

Now, let us assume you stay invested for 10 years and also the business you selected still has brighter prospects, your 1000/- becomes 2593/-. 1593 extra 😀

Wait…… Did you notice something? If you stayed invested for 5 years with an initial capital of 1000/-, you earn 610/- extra. And if you had opted to stay for another 5 more years, you are now getting 1593/- extra.

This means the first five years you earn 610/- and from 6th to 10th year you earn 983/- more (1593 earned in total 10 years minus 610 earned in initial five years). I hope you are getting my point. While it took 5 years to earn 610 as interest, it only took 5 more years to earn 983/- extra.

What will happen if I am invested for 15 years….??? That is a whopping 4177/-... 3177/- extra….

If you have got this, you successfully understood the power of compounding which in Mathematics never gave us the feel of the power it had….

That is the power of compounding… Just look at the interest earned in green color in the below chart. The more you stay on course, the more your returns get multiplied in a shorter time frame at later stages. 

So next time you have your meal outside for 1000/-, try to understand that the same money invested in a quality business delivering 15% growth will become 16366 in 20 years…. 16 times your initial capital.

Well, I am not saying you should stop enjoying your life...But, think of all your expenditures by the logic of compounding and surely you will start saving more. 

Lesson from all of this: 

I will recommend all of you to do is to make a list of all your expenditures, every single penny spent daily. At the end of each month, divide your expenses into discretionary and non-discretionary categories. The electricity bill, water bill, etc. are all nondiscretionary expenditures which you have to bear but ordering food from outside, hanging out with your friends more than needed, having junk is all that comes under the discretionary head. Make it a habit of cutting down your avoidable discretionary expenditures. 

You have successfully taken the second step towards your financial independence. Now we have learned a very important lesson to save our money, the next question which comes to mind is where to invest it?

In the next series of articles, we will explore the prerequisites one must have before putting our saved money in a healthy and quality business - Insurance which if not taken care of can derail your boat out of the ocean….

Till then, kindly spare a minute and comment below your thoughts on any suggestion/query/experience or whatsoever. Thanks for your valuable time. 

Happy Investing….!!!