Savvy investors understand the benefits of investing early and taking advantage of the potential gains from compound interest. Essentially, compound interest is the interest earned on interest. By continuously reinvesting your earnings, you are exponentially increasing your return on investment.
To help you understand how time and compound interest are related, here’s an example:
Twenty-five year old Raj invests RS 2,000 annually over 10 years in stocks with an average growth of 10 percent. When he retires, at the age of 65, his investment would have grown to Rs 556,197.
On the other hand consider Shaam, age 34, who invests Rs 2,000 annually over 30 years into stocks yielding the same 10 percent. At age 65, Shaam who has invested three times as much as Raj will only have Rs 328,988 in his retirement account.
In this example, Raj, who began investing early and gave his money time to earn compound interest has Rs 225,000 more than Shaam to spend during his retirement.