Many of us may have heard about the concept of compound interest. However, it starts only when we start managing our finances as working adults that we understand the impact and power of compounding.
The knowledge of the power of compounding not only helps you to earn a higher return on your investments and savings but also helps you to plan for your life’s important milestones.
The power of compounding helps increase your savings by accumulating more interest on money that was previously earned as interest.
What is the Power of Compounding?
Power of compounding is essentially an act of ‘adding interest on interest’ i.e. the amount of money invested, will generate earnings from both the initial principal amount and the accrued earnings from preceding compounding periods. Eventually, the power of compounding helps to grow your wealth over a certain period.
The most important aspect of the power of compounding is that your investments accrue interest on both the base capital and the previously earned interest. As an investor, you must keep in mind that the power of compounding lies in its ability to reinvest earnings on your investment. It means that you should not look to withdraw your returns due to short-term fluctuations.