How to be financially independent by starting early?
They say money cannot buy happiness, but it can buy the things or services that can make you happy. However, the thing that weighs us down is the lack of finance. All the dreams to buy a luxury house, going to an exotic place, cruising around in a sporty ride requires the crucial factor called MONEY!
What if I tell you, all this can be possible and even you can do it with the right techniques.
Curious as to how one can achieve this?
Well, to start I first want to explain the basic concept of compound interest and how one can use it to grow their wealth exponentially over time.
As we have learned during our school times and ignored the concept like everything else(Even mitochondria which is the powerhouse of the cell). So let me brush up on the concepts once again.
There are two types of interests available- Simple interest and compound interest. Simple interest as we know is the interest that is obtained annually on the same amount initially invested. That is if you invest 1000 for a period of 5 years with an interest rate of 10 percent then after one year, you will receive an interest amount of 100. After two years the interest rate will apply on the same initial principal amount and the interest amount will be the same that is 100. So at the maturity period, the total interest amount will be 500. Now let's talk about compound interest, unlike simple interest the interest is applied to the total amount(principal amount + interest amount). For example, as we know the interest amount after one year is 100. In the second year, the interest would apply to the total amount that is 1100 and so on and so forth. So the total interest earned at end of the maturity period would be 610.
The beauty of compound interest is that the longer you invest the amount, the higher returns you receive that let your wealth grow exponentially. Investing in tools that beat inflation is crucial as traditional methods like FDs and RDs help you to protect your money. If you have the same amount invested in these traditional instruments then the value of money won’t grow at the same rate as that of the expense of commodities. Better investment instruments like direct stocks and portfolio stocks that provide better returns are essential to experience the power of compounding.
Now let us say if you invest a sum of 10000 every month in your choice of investment instruments that yield you an annual return of 15 percent and you start this at the age of 25 and continue investing till the age of 35 the same amount in the same portfolio. After 35 you stop investing however you keep the amount as it is till the age of 60. The total amount invested after 10 years is 1,200,000. Seeing this your friend is motivated and decides to invest the same amount with the same investment instruments at the same rate of return but instead decides to invest till the age of 60. The total amount invested by your friend is 3,600,000. So at the end of the maturity period, the total amount with the returns would be whopping…
56,317,704
Well isn't that wonderful?
Now let’s check what could be your total
86,582,832
Confused?
Even though your friend did systematic investment for a longer period than you, however, you invested the amount the longest, which helped you have those massive financial gains.
So as evident, starting investing early can be really helpful. Systematic investment every month for a longer duration can attain huge returns with a small investment. This is the power of compounding that can help you be financially independent if you start at an early age.
