If you are looking for the best way to grow your wealth, there is nothing better than compound interest! This idea of compounding interest in finance is considered ‘the world’s eighth wonder. Let’s take a quick look to learn how compound interest can grow your wealth.
What is Compound Interest?
Compound interest refers to the process of earning interest on your money. However, what makes it different is that you don’t just earn interest on your invested amount but also on the interest it has already earned. So it is ‘interest on interest’.
If this sounds too complex, imagine you earn 10% interest every year upon investing Rs 10,000. Next year, your amount would be 11,000. Thereafter, 12,100/-, 13,310/-, 14,641/- and so on. So you are not just earning 10% on your principal amount of 10,000/- but on the total amount you have accumulated so far.
Why is Compound Interest Beneficial
Compound interest is beneficial because it is literally for everyone. Whether you are a student or a working professional, it can be started by anyone with minimal investment. Time plays a crucial role here, as the earnings are directly proportional to your invested time. The longer you keep your money, the more significant the amount you earn.
This type of investment triggers long-term investing and planning without you having to double or add up to your investment. It results in exponential fund growth without the investor having to move an inch: no market research, study, strategies, or fuss. You can earn while sleeping because it is literally like your money is making money!
Where to Invest to Gain Compound Interest
Here comes the million-dollar question. How can you compound interest, and what are the right places to invest for compounding interest? Find your answers below!
Fixed Deposits (FDs)
You can invest directly into FDs with your banks or NBFCs for a set period. Such investments are ideal for people who want to invest a large lump sum at once, as they offer you a compounded interest over time. Interest can be earned quarterly or annually based on different banks’ offerings. Some FDs yield quarterly returns, while others are set for annual. You shall receive maximum returns when your savings are compounded with interest quarterly. Fixed deposits have a fixed tenure. You can only withdraw your savings amount after that tenure is done.
Recurring Deposits (RDs)
This investment is the best option for anyone who wants to earn compound interest gradually at their own pace. All you need to do is decide on a minimum monthly investment amount. For, e.g., Rs. 1000, Rs. 2000, etc. You need to continue investing this amount every month, and with RD, you keep earning interest on the amount you accumulate every month. That means from the second month onwards, you will earn interest on your initially invested amount + the interest you already earned. A maturity term is also pre-decided upon which you receive your total investment + overall interest amount collected.
Retirement Accounts
Different countries offer varying types of retirement schemes and accounts. Choosing government-backed retirement accounts, such as 401(k) and Roth IRA in the United States, TFSA in Canada, CPF in Singapore, and PPF in India, allow you to earn compound interest on your savings.
The best part of such retirement amounts is that they encourage long-term savings and, thus, also provide tax benefits. Some accounts, such as PPF (India), CPF (Singapore), Superannuation (Australia), etc., are government-backed, offering the lowest-risk investment options for its citizens. Other retirement accounts might be government-regulated, too, but they don’t always provide a complete guarantee. It is best to check the clauses of your retirement account before proceeding.
Education/ Children’s Savings Plan
This type of plan is specific to its motive. As the name suggests, these plans are particularly for married individuals who aim to secure future funds for their children’s education.
529 Plan of the United States, Junior ISA of the UK, Sukanya Samriddhi Yojana (SSY) of India, and RESP from Canada are some education-based schemes offering compounded interest on your investments. Most of these savings plans provide tax exemption, too. Depending on the scheme clauses, you can set a maturity period and allow your children to avail of the amount at a certain age, too.
Digital Fintech Platforms
Digital Fintech platforms are online financial services that are driven by technology. Nowadays, these platforms play a key role in helping users to research, buy, sell and invest online. You can use platforms like Groww, Chime, Robinhood and Stash to invest in SIPs or stocks that allow compound interest.
Essentially, all monthly investment plans offer compound interest. Although their interest rate might vary periodically depending upon the market, your savings are compounded over time. The longer you keep it, the more significant the amount you receive at the end. However, this has a comparatively higher risk factor as it depends on market value and is subject to change.
Conclusion
Compound interest is the best way to grow wealth because it multiplies your money over time. Rather than investing in variable assets like gold or real estate, it is always preferable to begin investing in schemes or plans that provide compounded interest. You don’t need to spend hours studying the market or finding the right pick for you. Any government-backed action plan can be a go-to for even an absolute investment beginner.
Remember that this is not a get-rich-quick scheme. It requires dedication and patience, as your returns depend entirely on the time you set for your investments. If you begin earlier and keep your investments for as long as possible, compound interest is one of the most powerful wealth-building tools. So what are you waiting for? It’s your turn to start compounding interest!
