In a world where everyone is working hard for money, imagine your money working hard for you. Feels like a dream? But this dream can come true. The only thing to do for it is to learn about compound interest.

This single concept of mathematics is the reason behind the success of many people in the world. But with great power comes great responsibility and the responsibility is to use compound interest only for its positive effects.

The reason is that its other side can do the exact opposite, making a rich man poor in no time. So, in today's blog, we will see the power of compounding and how to employ it to make your money grow like the vines of grapes.

What is compound interest?

Let's learn compound interest in the context of investing. Let's say you have invested ₹200 in a bank account and you'll receive a compound interest of 8% on it monthly.

So, in the first month, you'll get ₹16 as the interest. But since there is compound interest in action, the next month's interest will be calculated at ₹200 the principal amount, and ₹16 the interest that is ₹216 in total. So, rather than your interest just getting collected, it also starts making money for you like the principal amount.

Three tips to make your money work harder for you with compounding

1.    Start Investing Early

Giving time to compounding is like giving water to a plant. The more you give it, the bigger it gets. So, if you start investing early even if the amount is not as big as you thought of investing, in the long run, you'll be getting much more.

For example, if you invest ₹2000 monthly at the age of 20 for the next 10 years at an annual interest rate of 8%, your corpus in maturity will be around 3 lakh 52 thousand on an investment of ₹2 lakh 42 thousand.

But if you double the amount for half the time, then you'll get ₹2 lakh 87 thousand on an investment of ₹2 lakh 44 thousand. So, that's the difference time can make.

2.    Make reinvestments with dividends

If some investment of yours gives you dividends, then you can invest the amount back to make more money. The reason is that the dividend is the profit shared by a company to its shareholders. So, ultimately even if you don't make a profit out of it you'll lose nothing. But practically, if a company has distributed a dividend this year, then chances are that its share will grow further.

3.    Be aware of compounding in Loans

While compounding has the power to double your money, if not in 21 days, you can find the time with this simple formula: 72/annual rate of interest = no. of years the money will get doubled in (approx).

Be Careful

Back to the topic, compound interest can also turn evil where instead of doubling your money it will eat your money exponentially. It's when you get a loan on compound interest and the interest rate is very high.

In this case, sometimes your interest in total comes out to be more than the principal loan amount. So, keep yourself away from high-interest loans, and if there is one going on, repay it faster by paying extra in principal.

Wrapping Up

So this is the power of compounding and the tips that you can employ to make your money work hard for you. But you should keep in mind that, where there is good there is bad. In the blog, we have talked about both and now it's your responsibility to prove your maths and investment skills.