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What is Power of Compounding ? A Simple Trick to become Rich

What is Power of Compounding ? A Simple Trick to become Rich
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A simple trick that has made people richer and richer without putting in any extra effort is nothing but the power of compounding. Compounding is an invention considered to be the 8th wonder of the world.

Here we have explained the power of compounding that can change lives if done effectively and patiently. All it takes is patience for the first few years and after that, the wonders are visible and would not let you quit the plan.

What is Compound Interest?

This is the very basic thing which we learn in our school but the application part we tend to forget. Compound interest is nothing but interest on interest. It is just a bit different from simple interest but creates a huge difference in the long run.

Let’s take an example, Mr. Dharmu invested Rs 10,000 in Fixed Deposit for 5 years at a simple interest of 5% per annum in 2015. So, in the year2020, when the 5 years are over, he should get an amount of Rs 12,500 (10,000 + 10,000 x 5% x 5 years). This makes an absolute return of 25% in 5 years (2500/10000).

Now, there is another plan where the same amount is invested for the same period of time and the same rate of interest but instead of simple interest if it is compound interest would change the game.

Calculation of Compound Interest (Table 1)

Year Amounted invested Interest Balance
1 10,000 500 10,500
2 10,500 525 11,025
3 11025 551 11,576
4 11576 579 12,155
5 12155 608 12,763

As per the Compound Interest, an investment of 10,000 becomes Rs 12,763 in 5 years giving an absolute return of 27.63% (2763/10000). Here, a rate of just 5% it made a difference of 2.63% in just five years. Imagine if the amount invested is big this 2.63% would also be huge.

Power of Compounding

The compounding that we get with an investment multiplies the principal amount over a less period of time as the investment period rises. This can be understood with an example of investment. Let’s say, there is a mutual fund offering a 12% annual rate of return which most mutual funds offer. An investment of Rs 1,000 at the beginning of every month is what we are considering here.

Investment of Rs 1,000 per month @12% for 5 years (Table 2)

No. year future value interest effective rate
1 1,010 10 0
2 2,030.10 30.1 0
3 3,060.40 60.4 0.02
4 4,101.01 101.01 0.03
5 5,152.02 152.02 0.03
6 6,213.54 213.54 0.04
7 7,285.67 285.67 0.04
8 8,368.53 368.53 0.05
9 9,462.21 462.21 0.05
10 10,566.83 566.83 0.06
11 11,682.50 682.5 0.06
12 1 12,809.33 809.33 0.07
13 13,947.42 947.42 0.07
14 15,096.90 1,096.90 0.08
15 16,257.86 1,257.86 0.08
16 17,430.44 1,430.44 0.09
17 18,614.75 1,614.75 0.09
18 19,810.90 1,810.90 0
19 21,019 2,019 0.11
20 22,239.19 2,239.19 0.11
21 23,471.59 2,471.59 0.12
22 24,716.30 2,716.30 0.12
23 25,973.46 2,973.46 0.13
24 2 27,243.20 3,243.20 0.14
25 28,525.63 3,525.63 0.14
26 29,820.89 3,820.89 0.15
27 31,129.10 4,129.10 0.15
28 32,450.39 4,450.39 0.16
29 33,784.89 4,784.89 0.17
30 35,132.74 5,132.74 0.17
31 36,494.07 5,494.07 0.18
32 37,869.01 5,869.01 0.18
33 39,257.70 6,257.70 0.19
34 40,660.28 6,660.28 0.20
35 42,076.88 7,076.88 0.20
36 3 43,507.65 7,507.65 0.21
37 44,952.72 7,952.72 0.21
38 46,412.25 8,412.25 0.22
39 47,886.37 8,886.37 0.23
40 49,375.24 9,375.24 0.23
41 50,878.99 9,878.99 0.24
42 52,397.78 10,397.78 0.25
43 53,931.76 10,931.76 0.25
44 55,481.07 11,481.07 0.26
45 57,045.89 12,045.89 0.27
46 58,626.34 12,626.34 0.27
47 60,222.61 13,222.61 0.28
48 4 61,834.83 13,834.83 0.29
49 63,463.18 14,463.18 0.30
50 65,107.81 15,107.81 0.30
51 66,768.89 15,768.89 0.31
52 68,446.58 16,446.58 0.32
53 70,141.05 17,141.05 0.32
54 71,852.46 17,852.46 0.33
55 73,580.98 18,580.98 0.34
56 75,326.79 19,326.79 0.35
57 77,090.06 20,090.06 0.35
58 78,870.96 20,870.96 0.36
59 80,669.67 21,669.67 0.37
60 5 82,486.37 22,486.37 0.37
61 84,321.23 23,321.23 0.38
62 86,174.44 24,174.44 0.39
63 88,046.19 25,046.19 0.40
64 89,936.65 25,936.65 0.41
65 91,846.02 26,846.02 0.41
66 93,774.48 27,774.48 0.42
67 95,722.22 28,722.22 0.43
68 97,689.44 29,689.44 0.44
69 99,676.34 30,676.34 0.44
70 1,01,683.10 31,683.10 0.45
71 1,03,709.93 32,709.93 0
72 6 1,05,757.03 33,757.03 0.47
73 1,07,824.60 34,824.60 0.48
74 1,09,912.85 35,912.85 0.49
75 1,12,021.98 37,021.98 0.49
76 1,14,152.20 38,152.20 0.50
77 1,16,303.72 39,303.72 0.51
78 1,18,476.75 40,476.75 0.52
79 1,20,671.52 41,671.52 0.53
80 1,22,888.24 42,888.24 0.54
81 1,25,127.12 44,127.12 0.54
82 1,27,388.39 45,388.39 0.55
83 1,29,672.27 46,672.27 0.56
84 7 1,31,979 47,979 0.57
85 1,34,308.79 49,308.79 0.58
86 1,36,661.87 50,661.87 0.59
87 1,39,038.49 52,038.49 0.60
88 1,41,438.88 53,438.88 0.61
89 1,43,863.27 54,863.27 0.62
90 1,46,311.90 56,311.90 0.63
91 1,48,785.02 57,785.02 0.64
92 1,51,282.87 59,282.87 0.64
93 1,53,805.70 60,805.70 0.65
94 1,56,353.76 62,353.76 0.66
95 1,58,927.29 63,927.29 0.67
96 8 1,61,526.57 65,526.57 0.68
97 1,64,151.83 67,151.83 1
98 1,66,803.35 68,803.35 0.70
99 1,69,481.38 70,481.38 0.71
100 1,72,186.20 72,186.20 0.72
101 1,74,918.06 73,918.06 0.73
102 1,77,677.24 75,677.24 0.74
103 1,80,464.01 77,464.01 0.75
104 1,83,278.65 79,278.65 0.76
105 1,86,121.44 81,121.44 0.77
106 1,88,992.65 82,992.65 0.78
107 1,91,892.58 84,892.58 0.79
108 9 1,94,821.51 86,821.51 0.80
109 1,97,779.72 88,779.72 0.81
110 2,00,767.52 90,767.52 0.83
111 2,03,785.19 92,785.19 0.84
112 2,06,833.04 94,833.04 0.85
113 2,09,911.37 96,911.37 0.86
114 2,13,020.49 99,020.49 0.87
115 2,16,160.69 1,01,160.69 0.88
116 2,19,332.30 1,03,332.30 0.89
117 2,22,535.62 1,05,535.62 0.90
118 2,25,770.98 1,07,770.98 0.91
119 2,29,038.69 1,10,038.69 1
120 10 2,32,339.08 1,12,339.08 0.94
121 2,35,672.47 1,14,672.47 0.95
122 2,39,039.19 1,17,039.19 0.96
123 2,42,439.58 1,19,439.58 0.97
124 2,45,873.98 1,21,873.98 0.98
125 2,49,342.72 1,24,342.72 0.99
126 2,52,846.15 1,26,846.15 1.01
127 2,56,384.61 1,29,384.61 1.02
128 2,59,958.45 1,31,958.45 1.03
129 2,63,568.04 1,34,568.04 1.04
130 2,67,213.72 1,37,213.72 1.06
131 2,70,895.86 1,39,895.86 1.07
132 11 2,74,614.81 1,42,614.81 1.08
133 2,78,370.96 1,45,370.96 1.09
134 2,82,164.67 1,48,164.67 1.11
135 2,85,996.32 1,50,996.32 1.12
136 2,89,866.28 1,53,866.28 1.13
137 2,93,774.95 1,56,774.95 1.14
138 2,97,722.69 1,59,722.69 1.16
139 3,01,709.92 1,62,709.92 1.17
140 3,05,737.02 1,65,737.02 1.18
141 3,09,804.39 1,68,804.39 1.20
142 3,13,912.44 1,71,912.44 1.21
143 3,18,061.56 1,75,061.56 1.22
144 12 3,22,252.17 1,78,252.17 1.24
145 3,26,484.70 1,81,484.70 1.25
146 3,30,759.54 1,84,759.54 1.27
147 3,35,077.14 1,88,077.14 1.28
148 3,39,437.91 1,91,437.91 1.29
149 3,43,842.29 1,94,842.29 1.31
150 3,48,290.71 1,98,290.71 1.32
151 3,52,783.62 2,01,783.62 1.34
152 3,57,321.46 2,05,321.46 1.35
153 3,61,904.67 2,08,904.67 1.37
154 3,66,533.72 2,12,533.72 1.38
155 3,71,209.05 2,16,209.05 1.39
156 13 3,75,931.14 2,19,931.14 1.41
157 3,80,700.46 2,23,700.46 1.42
158 3,85,517.46 2,27,517.46 1.44
159 3,90,382.64 2,31,382.64 1.46
160 3,95,296.46 2,35,296.46 1.47
161 4,00,259.43 2,39,259.43 1.49
162 4,05,272.02 2,43,272.02 1.50
163 4,10,334.74 2,47,334.74 1.52
164 4,15,448.09 2,51,448.09 1.53
165 4,20,612.57 2,55,612.57 1.55
166 4,25,828.69 2,59,828.69 1.57
167 4,31,096.98 2,64,096.98 1.58
168 14 4,36,417.95 2,68,417.95 1.60
169 4,41,792.13 2,72,792.13 1.61
170 4,47,220.05 2,77,220.05 1.63
171 4,52,702.25 2,81,702.25 1.65
172 4,58,239.28 2,86,239.28 1.66
173 4,63,831.67 2,90,831.67 1.68
174 4,69,479.98 2,95,479.98 1.70
175 4,75,184.78 3,00,184.78 1.72
176 4,80,946.63 3,04,946.63 1.73
177 4,86,766.10 3,09,766.10 1.75
178 4,92,643.76 3,14,643.76 1.77
179 4,98,580.20 3,19,580.20 1.79
180 15 5,04,576 3,24,576 1.80
181 5,10,631.76 3,29,631.76 1.82
182 5,16,748.08 3,34,748.08 1.84
183 5,22,925.56 3,39,925.56 1.86
184 5,29,164.81 3,45,164.81 1.88
185 5,35,466.46 3,50,466.46 1.89
186 5,41,831.13 3,55,831.13 1.91
187 5,48,259.44 3,61,259.44 1.93
188 5,54,752.03 3,66,752.03 1.95
189 5,61,309.55 3,72,309.55 1.97
190 5,67,932.65 3,77,932.65 1.99
191 5,74,621.97 3,83,621.97 2.01
192 16 5,81,378.19 3,89,378.19 2.03
193 5,88,201.98 3,95,201.98 2.05
194 5,95,094 4,01,094 2.07
195 6,02,054.94 4,07,054.94 2.09
196 6,09,085.48 4,13,085.48 2.11
197 6,16,186.34 4,19,186.34 2
198 6,23,358.20 4,25,358.20 2.15
199 6,30,601.79 4,31,601.79 2.17
200 6,37,917.80 4,37,917.80 2.19
201 6,45,306.98 4,44,306.98 2.21
202 6,52,770.05 4,50,770.05 2.23
203 6,60,307.75 4,57,307.75 2.25
204 17 6,67,920.83 4,63,920.83 2.27
205 6,75,610.04 4,70,610.04 2.30
206 6,83,376.14 4,77,376.14 2
207 6,91,219.90 4,84,219.90 2.34
208 6,99,142.10 4,91,142.10 2.36
209 7,07,143.52 4,98,143.52 2.38
210 7,15,224.95 5,05,224.95 2.41
211 7,23,387.20 5,12,387.20 2.43
212 7,31,631.08 5,19,631.08 2
213 7,39,957.39 5,26,957.39 2.47
214 7,48,366.96 5,34,366.96 2.50
215 7,56,860.63 5,41,860.63 2.52
216 18 7,65,439.24 5,49,439.24 3
217 7,74,103.63 5,57,103.63 3
218 7,82,854.66 5,64,854.66 3
219 7,91,693.21 5,72,693.21 3
220 8,00,620.14 5,80,620.14 3
221 8,09,636.35 5,88,636.35 3
222 8,18,742.71 5,96,742.71 3
223 8,27,940.14 6,04,940.14 3
224 8,37,229.54 6,13,229.54 3
225 8,46,611.83 6,21,611.83 3
226 8,56,087.95 6,30,087.95 3
227 8,65,658.83 6,38,658.83 3
228 19 8,75,325.42 6,47,325.42 3
229 8,85,088.67 6,56,088.67 3
230 8,94,949.56 6,64,949.56 3
231 9,04,909.05 6,73,909.05 3
232 9,14,968.15 6,82,968.15 3
233 9,25,127.83 6,92,127.83 3
234 9,35,389.11 7,01,389.11 3
235 9,45,753 7,10,753 3
236 9,56,220.53 7,20,220.53 3
237 9,66,792.73 7,29,792.73 3
238 9,77,470.66 7,39,470.66 3
239 9,88,255.37 7,49,255.37 3
240 20 9,99,147.92 7,59,147.92 316.31%
241 10,10,149.40 7,69,149.40 319.15%
242 10,21,260.89 7,79,260.89 322.01%
243 10,32,483.50 7,89,483.50 324.89%
244 10,43,818.34 7,99,818.34 327.79%
245 10,55,266.52 8,10,266.52 330.72%
246 10,66,829.18 8,20,829.18 333.67%
247 10,78,507.48 8,31,507.48 336.64%
248 10,90,302.55 8,42,302.55 339.64%
249 11,02,215.58 8,53,215.58 342.66%
250 11,14,247.73 8,64,247.73 345.70%
251 11,26,400.21 8,75,400.21 348.77%
252 21 11,38,674.21 8,86,674.21 351.86%
253 11,51,070.95 8,98,070.95 354.97%
254 11,63,591.66 9,09,591.66 358.11%
255 11,76,237.58 9,21,237.58 361.27%
256 11,89,009.96 9,33,009.96 364.46%
257 12,01,910.06 9,44,910.06 367.67%
258 12,14,939.16 9,56,939.16 370.91%
259 12,28,098.55 9,69,098.55 374.17%
260 12,41,389.53 9,81,389.53 377.46%
261 12,54,813.43 9,93,813.43 380.77%
262 12,68,371.56 10,06,371.56 384.11%
263 12,82,065.28 10,19,065.28 387.48%
264 22 12,95,895.93 10,31,895.93 390.87%
265 13,09,864.89 10,44,864.89 394.29%
266 13,23,973.54 10,57,973.54 397.73%
267 13,38,223.27 10,71,223.27 401.21%
268 13,52,615.51 10,84,615.51 404.71%
269 13,67,151.66 10,98,151.66 408.24%
270 13,81,833.18 11,11,833.18 411.79%
271 13,96,661.51 11,25,661.51 415.37%
272 14,11,638.13 11,39,638.13 418.99%
273 14,26,764.51 11,53,764.51 422.62%
274 14,42,042.15 11,68,042.15 426.29%
275 14,57,472.57 11,82,472.57 429.99%
276 23 14,73,057.30 11,97,057.30 433.72%
277 14,88,797.87 12,11,797.87 437.47%
278 15,04,695.85 12,26,695.85 441.26%
279 15,20,752.81 12,41,752.81 445.07%
280 15,36,970.34 12,56,970.34 448.92%
281 15,53,350.04 12,72,350.04 452.79%
282 15,69,893.54 12,87,893.54 456.70%
283 15,86,602.48 13,03,602.48 460.64%
284 16,03,478.50 13,19,478.50 464.61%
285 16,20,523.29 13,35,523.29 468.61%
286 16,37,738.52 13,51,738.52 472.64%
287 16,55,125.91 13,68,125.91 476.70%
288 24 16,72,687.16 13,84,687.16 480.79%
289 16,90,424.04 14,01,424.04 484.92%
290 17,08,338.28 14,18,338.28 489.08%
291 17,26,431.66 14,35,431.66 493.28%
292 17,44,705.98 14,52,705.98 497.50%
293 17,63,163.04 14,70,163.04 501.76%
294 17,81,804.67 14,87,804.67 506.06%
295 18,00,632.71 15,05,632.71 510.38%
296 18,19,649.04 15,23,649.04 514.75%
297 18,38,855.53 15,41,855.53 519.14%
298 18,58,254.09 15,60,254.09 523.58%
299 18,77,846.63 15,78,846.63 528.04%
300 25 18,97,635.09 15,97,635.09 532.55%
301 19,17,621.44 16,16,621.44 537.08%
302 19,37,807.66 16,35,807.66 541.66%
303 19,58,195.73 16,55,195.73 546.27%
304 19,78,787.69 16,74,787.69 550.92%
305 19,99,585.57 16,94,585.57 555.60%
306 20,20,591.42 17,14,591.42 560.32%
307 20,41,807.34 17,34,807.34 565.08%
308 20,63,235.41 17,55,235.41 569.88%
309 20,84,877.77 17,75,877.77 574.72%
310 21,06,736.54 17,96,736.54 579.59%
311 21,28,813.91 18,17,813.91 584.51%
312 26 21,51,112.05 18,39,112.05 589.46%
313 21,73,633.17 18,60,633.17 594.45%
314 21,96,379.50 18,82,379.50 599.48%
315 22,19,353.30 19,04,353.30 604.56%
316 22,42,556.83 19,26,556.83 609.67%
317 22,65,992.40 19,48,992.40 614.82%
318 22,89,662.32 19,71,662.32 620.02%
319 23,13,568.94 19,94,568.94 625.26%
320 23,37,714.63 20,17,714.63 630.54%
321 23,62,101.78 20,41,101.78 635.86%
322 23,86,732.80 20,64,732.80 641.22%
323 24,11,610.13 20,88,610.13 646.63%
324 27 24,36,736.23 21,12,736.23 652.08%
325 24,62,113.59 21,37,113.59 657.57%
326 24,87,744.72 21,61,744.72 663.11%
327 25,13,632.17 21,86,632.17 668.70%
328 25,39,778.49 22,11,778.49 674.32%
329 25,66,186.28 22,37,186.28 680.00%
330 25,92,858.14 22,62,858.14 685.72%
331 26,19,796.72 22,88,796.72 691.48%
332 26,47,004.69 23,15,004.69 697.29%
333 26,74,484.74 23,41,484.74 703.15%
334 27,02,239.58 23,68,239.58 709.05%
335 27,30,271.98 23,95,271.98 715.01%
336 28 27,58,584.70 24,22,584.70 721.01%
337 27,87,180.55 24,50,180.55 727.06%
338 28,16,062.35 24,78,062.35 733.16%
339 28,45,232.98 25,06,232.98 739.30%
340 28,74,695.31 25,34,695.31 745.50%
341 29,04,452.26 25,63,452.26 751.75%
342 29,34,506.78 25,92,506.78 758.04%
343 29,64,861.85 26,21,861.85 764.39%
344 29,95,520.47 26,51,520.47 770.79%
345 30,26,485.67 26,81,485.67 777.24%
346 30,57,760.53 27,11,760.53 783.75%
347 30,89,348.13 27,42,348.13 790.30%
348 29 31,21,251.62 27,73,251.62 796.91%
349 31,53,474.13 28,04,474.13 803.57%
350 31,86,018.87 28,36,018.87 810.29%
351 32,18,889.06 28,67,889.06 817.06%
352 32,52,087.95 29,00,087.95 823.89%
353 32,85,618.83 29,32,618.83 830.77%
354 33,19,485.02 29,65,485.02 837.71%
355 33,53,689.87 29,98,689.87 844.70%
356 33,88,236.77 30,32,236.77 851.75%
357 34,23,129.14 30,66,129.14 858.86%
358 34,58,370.43 31,00,370.43 866.03%
359 34,93,964.13 31,34,964.13 873.25%
360 30 35,29,913.77 31,69,913.77 880.53%

And, this calculation would continue for any number of years. An investment of Rs 1,000 per month for 30 years is mere Rs 3,60,000 in absolute terms but a 12% compounding rate makes it Rs 35 Lakhs.

chart showing future value

It sounds surprising but it’s just the power of compounding where we have taken a rate of return of only 12% which is very minimal to consider.

How to Calculate the Future Value of an Investment?

Here in the above table, we have given a calculation of 1,000 per month with a rate of 12%. Your investment would definitely be different according to the income and it’s possible that you might get a different rate of return also. So, how to find out the amount of future value it would generate after a certain period of time?

So, firstly you can use a formula and calculate the future value in your calculator or take the help of an excel sheet. The formula that you will use in your Calculator is as follows:

future value formula

Or you can use a simple excel sheet as shown in table 1. and keep on expanding.

Apart from these if you just simply search Future Value calculator on Google you will get a lot of websites to do that. And, that’s the simplest and smartest way out to see the power of compounding.

Click here to use the Future Value Calculator from Casio