With the passage of time people are becoming more concerned and aware about their investment and savings habits .They want to best utilize their funds so as to get the potential maximum benefit of it. In such a situation not a single term of finance can be underestimated.
Today we are going to talk about one such financial terminology history of which is not new but with the changing generation the concept becomes new for different categories of people. Value of Compounding is one of the simple, but a very powerful concept. Why powerful? Because compounding is similar to a multiplier effect since the interest that is earned by the initial capital also earns an interest, the value of the investment grows at a geometric (always increasing) rate rather than an arithmetic (straight-line).
Value of compounding has been considered the 8th wonder of science invented by and first described by the well known scientist Albert Einstein.
Value of compounding is the most facinated word I have heard in the world of finance.
Value of compounding is not just a theoretical term rather a practical approach by the implementation of which one can be a millionaire over a period of time and achieve their dream to become a millionaire.
The beauty of this approach is that people who belong to any stream of job or profession or whatever their income level can adopt this theory and implement in their practical life just a little bit of understanding.
The most specific feature and again the beauty of this theory is that the people making themselves aware of as early in their life getting more benefited from it.
Some necessary requirements to understand and use this theory
Having at least definitive source of income
The basic requirements of a person having at least definitive source of income as the whole game rely or depend on the habit of savings.
Start as early as possible
The whole game relies on the horizon of the time frame so it would be better or advisable for people to start as soon as possible as it works on the principle that the longer the time frame would be, the more benefit one shall receive.
People don't need to have an expertise in finance or relative term just a little bit of knowledge of finance is sufficient to understand the calculation.
Consistency or disciplinary approach
Consistency or disciplinary approach is one of the powerful things in order to excel in any skill and applicable to every stream of life as well as saving and investment too. Therefore one should be very much consistent and disciplined with their saving habit and investment to achieve maximum advantage.
Every kind of savings and investment whether it would be equity market investment, mutual fund or bank related investment all are based on this theory "Value of Compounding".
Therefore it would be advisable for everyone to have a basic understanding about this theory before going ahead for taking any investment related decision and want to encourage their saving habit.
Basically, compounding is a long-term investment strategy. For example, when you own a mutual fund, compounding allows you to earn interest on your principal. Compounding also occurs when you re-invest your earnings. In the case of mutual funds, this means re-investing your interest or dividend, and receiving additional units. By doing such a thing, you are earning a return on your returns and the principal. When the principal is combined with the re-invested income, your investment will grow at an increased rate.
The best way to take advantage of compounding is to start saving and investing wisely as early as possible. The earlier you start investing, the greater will be the power of compounding.
Disclaimer: the intention of writing this article is just to spread the knowledge and make the people aware of this theory although various points need to be covered but highlighted a few points for the sake of convenience of readers. If anyone interested to know further they can visit the respective website of their choice.