How to Create Wealth like Warren Buffet but every one is always searching for the Magic Lamp of Aladdin .
But the Real Magic Lamp of today’s World is the ” Power of Compounding “.Yes its the 8th Wonder of the World.
What is Compounding ? Compounding is earning interest on interest you have already earned on the Principal amount you have invested in Fixed Deposit , Mutual Fund or any other investment. Lets understand by example .
Suppose there are two Individuals A and B . Individual A earns Simple Interest 12 % Per Year and Individual B earns a Compound Interest of 12 % for 5 Years on amount of Rs. 10 Lakh . Rate of Interest 12 % , Amount of Rs. 10 Lakh and Time 5 Years is Same for both.
Individual A Earns Rs. 600000 as Simple Interest and Total Amount is Rs. 1000000 Principal + Rs. 600000 as Interest so amount after 5 Years is Rs. 1600000 .
Individual B Earns Rs.762341 as Compound Interest and Total Amount is Rs. 1000000 + Rs. 762341 as Compound Interest so amount after 5 Years is Rs. 1762341 .
So Individual B Earned 1762341-1600000 = Rs. 162341 more than Individual A.
This is the ” Power of Compounding ” . Earning Interest on Interest + Principal amount.
Simple Interest
Simple interest is calculated :
Principal Amount X Rate of Interest X Term of Loan in Years
Compound interest is calculated :
Compound Interest=P×(1+r)t−P
P = Principal Amount
r= Rate of Interest
t= Time of Loan
Lets see another Table at Different Compounding Interest Rates from 5% to 11 % Per Annum for 5 Years :
| Principal | 1000000 | 1000000 | 1000000 | 1000000 | 1000000 | 1000000 | 1000000 |
| Rate of Interest | 5.00% | 6.00% | 7.00% | 8.00% | 9.00% | 10.00% | 11.00% |
| Time in Years | 5 | 5 | 5 | 5 | 5 | 5 | 5 |
| Total Amount After Compounding Interest | 1276282 | 1338226 | 1402552 | 1469328 | 1538624 | 1610510 | 1685058 |
Lets see another Table at Different Compounding Interest Rates from 5% to 11 % Per Annum for 10 Years :
| Principal | 1000000 | 1000000 | 1000000 | 1000000 | 1000000 | 1000000 | 1000000 |
| Rate of Interest | 5.00% | 6.00% | 7.00% | 8.00% | 9.00% | 10.00% | 11.00% |
| Time in Years | 10 | 10 | 10 | 10 | 10 | 10 | 10 |
| Total Amount After Compounding Interest | 1628895 | 1790848 | 1967151 | 2158925 | 2367364 | 2593742 | 2839421 |
Lets see another Table at Different Compounding Interest Rates from 5% to 11 % Per Annum for 15 Years :
| Principal | 1000000 | 1000000 | 1000000 | 1000000 | 1000000 | 1000000 | 1000000 |
| Rate of Interest | 5.00% | 6.00% | 7.00% | 8.00% | 9.00% | 10.00% | 11.00% |
| Time in Years | 15 | 15 | 15 | 15 | 15 | 15 | 15 |
| Total Amount After Compounding Interest | 2078928 | 2396558 | 2759032 | 3172169 | 3642482 | 4177248 | 4784589 |
Lets see another Table at Different Compounding Interest Rates from 5% to 11 % Per Annum for 30 Years :
| Principal | 1000000 | 1000000 | 1000000 | 1000000 | 1000000 | 1000000 | 1000000 |
| Rate of Interest | 5.00% | 6.00% | 7.00% | 8.00% | 9.00% | 10.00% | 11.00% |
| Time in Years | 30 | 30 | 30 | 30 | 30 | 30 | 30 |
| Total Amount After Compounding Interest | 4321942 | 5743491 | 7612255 | 10062657 | 13267678 | 17449402 | 22892297 |
The above examples shows How to Create Wealth more time you give to your Investment the Multiple of Return is Higher that’s the ” Power of Compounding “.
Rs. 1000000 at 5 % Interest after 5 Years= 1276282 10 Years = 1628895 15 Years = 2078928 30 Years=4321942
Rs. 1000000 at 12 % Interest after 5 Years=1685058 10 Years =2839421 15 Years = 4784589 30 Years=22892297
So this Clearly shows ” Power of Compounding ” works when Time given for Investment is Higher and Rate of Return is Higher .That’s How to Create Wealth ? .
So Start Investing Early .
Warren Buffet Documentary : https://www.youtube.com/watch?v=RYHPlLsdW0A
Also See :
Top Finance Documentaries :https://financeloaninsurance.com/top-finance-documentaries/
Monthly Budget Planner : https://financeloaninsurance.com/monthly-budget-planner/