Power of compounding can be experienced, when your earnings start generating more earnings. You receive interest not only on your original investments, but also on any interest and dividends that accumulate. This way, your money can grow faster and faster, as years go by.
Let’s take an example:
Let’s say you have 2 separate accounts having Rs 1 Lac. Each account earns 8% every year. In first account, you withdraw your investment earnings each year and the value of the account stays steady (Red Line in chart). In other account, you don’t cash out your interest earnings, i.e. they get reinvested. The curved green line shows the power of compounding and time. If you keep reinvesting the interests, after 40 years, your investment will have grown to more than Rs 20 Lacs.
In this way,it would be your money working for you rather than you working for money. And this will make a huge difference to your future account balance.
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