The Power of Compounding

Imagine two investors A and B. Assume that investor B starts earning at the young age of 19 and decides to put aside Rs 20,000 every year till the time he turns 26. And that's it. He doesn't invest a penny afterwards. Now, let us consider investor A. Unlike B, investor A starts investing Rs 20,000 only after he turns 26. But does so dutifully every year till the time he reaches 65 years of age. Both of them are assumed to earn 10% per annum on their investments.

Now here comes the real shocker. We know that investor B has made only seven contributions while A has made around 40 contributions towards his portfolio. Despite this, you'd be amazed to know that B will end up with more money than A when both of them turn 65. In other words, while A's money has grown around 11 times, B has been able to grow its money a whopping 66 times.

The above example clearly highlights the magic that the process of compounding works on one's portfolio. Just by letting his money compound over a slightly more number of years, investor B was able to make more money than A even though he made far less number of contributions. And therein lies the biggest secret to becoming rich we believe.  

Investment returns over a long period are not dependant as much on the amount of money one puts aside. They are more a function of letting compounding work its magic by starting to invest as early as possible.