POWER OF COMPOUNDING
The basic formula for compounding is
FV = PV × (1+r)n
where FV = Future Value
PV = Present Value
r = annual interest rate
n = number of periods
For example if PV is 1000,
Annual interest rate is 10%
Compounding for 5 years
The Future value will be RS.1610.50
Compare this with simple interest.
The future value on simple interest basis is Rs.1500 only
In other words, interest earned is higher by 22.1% at end of 5 years!
Here is how Rs.100000 multiplies when compounded at 6, 8 & 10 per cent p.a over
5,10& 15 year periods.
Years/int rate 6 8 10
5 yes 1.34 1.47 1.61
10 yrs 1.79 2.15 2.59
15 yrs 2.40 3.17 4.18
(Rs. in lacs)
This shows that even a small difference of
2 per cent makes a big difference in earnings over a period!
Also longer the period of compounding higher is the total amount at the end!
So, it is clear now one should start early to sav
and even a small difference in rate of interest increases the final savings significantly.
Keep this in mind and more important teach your children to START SAVING EARLY and REGULARLY.
People should start saving right from the first pay check.
Remember to save a minimum per cent of your salary. Savings should be the first expense!
I said ‘ a per cent’ . This will imply that the absolute amount of savings increase with rising salary levels. See for yourself how the compounding would make greater impact on final amount, using the above formula.
Interesting, Isn’t it? Compound Interest is interesting!
