Magic of compounding: You must have heard the term power of compounding mentioned many times by personal finance experts. If we understand the meaning of compounding in simple language, then it is interest on interest and a rapid increase in your wealth. That is, compounding is the process in which you earn more interest on the interest already deposited. If you want to take maximum advantage of compounding, then for this you have to maintain patience in your investment. If you are really able to do this, then the real magic of compounding will be seen. Here, we are giving information about a rule of compounding called the 8-4-3 Rule through which after a time your wealth will increase in a big way!
8-4-3 Rule in Compounding
You can understand the 8-4-3 rule of compounding to grow your money faster. According to this rule, if you do an SIP of Rs 30,000 every month and your scheme gives a return of 12% interest annually (yearly compounded 12% interest), then in the first 8 years your wealth will increase to Rs 50 lakh. In the next 4 years only, your wealth will increase from Rs 50 lakh to Rs 1 crore. After this, it will take only 3 years to increase from 1 crore to 1.5 crore. That is, if it took 8 years to reach 50 lakh the first time, then it took 4 years to get the next 50 lakh and then only 3 years to get the next 50 lakh.
Also read; Top 10 Mutual Funds For SIP In 2024
Compounding Explained
When you invest your money, the return or interest on it can be added in two ways. First, simple interest or return, in which interest is added to the money deposited by you. Second, compound interest, in which a return is added on the principal amount deposited by you as well as the interest earned on it. For example, if you have invested 1 lakh and the interest received on it after one year is 10 thousand. So if you add interest to the principal amount, this amount becomes Rs 1,10,000. Now the next interest will be added on Rs 1,10,000. This process will continue further.
