Home loans and compounding

The Power of Simple Compounding

Compounding is a concept that many people know about, but very few actually use it to its full potential. In today’s world, where information is easily accessible, more people are aware of how compounding works. However, despite this knowledge, many still don’t apply it in their financial lives. The idea of compounding might seem too simple or too obvious, so people often overlook its importance. But in reality, it’s one of the most effective ways to grow wealth over time.

Understanding the Power of Compounding

To make a significant amount of money, like a crore of rupees, compounding can be a powerful tool. For instance, if you find an investment strategy that gives you a 15% post-tax compound annual growth rate (CAGR), you would only need to invest around Rs. 16,000 per month for 15 years to reach your goal. If you have a shorter time frame, say 10 years, you’d need to invest Rs. 38,000 per month. And if you aim to reach your goal in just five years, you would need to invest around Rs. 1,14,000 per month. The compounding effect, when applied consistently, can help you achieve your financial goals without much hassle.

Inflation and Real Returns

One common concern people have is inflation. They worry that inflation might erode the returns they get from their investments. However, if your investment strategy is giving you a 15% post-tax return, and inflation is around 6%, you’re still making a 9% real return. This means you’re earning 9% more than the inflation rate, which is a pretty good deal. In fact, any return that is 5% or more above inflation is considered a great return for compounding. Over time, these real returns can add up, helping you reach your financial targets.

The Power of Regular Investing

The idea of saving and investing regularly, whether through SIPs (Systematic Investment Plans) or EMIs (Equated Monthly Installments), might seem daunting at first. When you start, saving Rs. 58,000 per month for ten years might feel like a stretch. However, as time goes on, your financial situation often improves. You might earn more in your job, your partner might start contributing to the household income, or you might receive some inheritance. As your income grows, the amount you save and invest can also increase. The key is to make saving and investing a priority before spending on other things.

Balancing Savings and Enjoying Life

While it’s essential to be disciplined in saving and investing, it’s also important to find a balance. Saving and investing should not come at the cost of enjoying life. It’s crucial to strike a balance between preparing for the future and living in the present. Many people find this balance when they take out a home loan. A home loan forces you to save by making you pay a certain amount every month. Even though real estate may only give you a 9-12% return over time, the forced savings aspect of a home loan can help many people build wealth.

The Importance of Discipline

Discipline is key when it comes to building wealth through compounding. Whether you’re investing in the stock market or paying off a home loan, staying consistent with your savings is what makes the difference. Over time, these small, regular investments grow into significant amounts. For young people, understanding the importance of saving and investing early can set the foundation for financial success in the future.

Check out the detailed video on the WeekendInvesting App