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Saving: The Magic of Compound Interest

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Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest.  In short, you make money from your money.  Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount.  In fact, Albert Einstein once was purported to have stated,“The most powerful force in the universe is compound interest.”  The below three examples will illustrated the power of compound interest.

Example #1

By instilling the saving habit early in life, even the goal of becoming a millionaire by the age of sixty-five can be reached. By starting at the age of twenty and saving Rs95 per month, you can end up with a million rupees by the age of sixty-five, assuming a 10 percent return on the money (tax deferred). This is also assuming that none of the money will be withdrawn during the waiting period.

This goal also can be reached if you wait until you are older to start saving, but the amount you must contribute monthly increases dramatically the longer you wait. For example, if you wait until you are thirty years old, you will need to save Rs263 a month. If you wait until you are forty years old, you will need to save Rs754 a month, and if you wait until you are fifty years old, you will need to save Rs2,413 a month.  The below chart also shows how you can reach the Rs1 million goal by age 65 if you prefer to make a one-time investment, monthly investment or annual investment at various ages.

Age

One-time Investment

Monthly Investment

Annual Investment

20

Rs13,719

Rs95

Rs1,391

25

Rs22,095

Rs158

Rs2,259

30

Rs35,584

Rs263

Rs3,690

35

Rs57,309

Rs442

Rs6,079

40

Rs92,296

Rs754

Rs10,168

45

Rs148,644

Rs1,317

Rs17,460

50

Rs239,392

Rs2,413

Rs31,474

55

Rs385,543

Rs4,882

Rs62,745

60

Rs620,921

Rs12,914

Rs163,797

Example #2

This table illustrates the value over time of Rs1,000 invested annually (only Rs84 a month):

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

Rs5,526

Rs12,578

Rs21,579

Rs33,066

6%

Rs5,637

Rs13,181

Rs23,276

Rs36,786

7%

Rs5,751

Rs13,816

Rs25,129

Rs40,995

8%

Rs5,867

Rs14,487

Rs27,152

Rs45,762

9%

Rs5,985

Rs15,193

Rs29,361

Rs51,160

10%

Rs6,105

Rs15,937

Rs31,772

Rs57,275

11%

Rs6,228

Rs16,722

Rs34,405

Rs64,203

12%

Rs6,353

Rs17,549

Rs37,280

Rs72,052

Example #3

Investing Rs10,000 in a one-time lump sum also pays off:

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

Rs12,763

Rs16,289

Rs20,789

Rs26,533

6%

Rs13,382

Rs17,908

Rs23,966

Rs32,071

7%

Rs14,026

Rs19,672

Rs27,590

Rs38,697

8%

Rs14,693

Rs21,589

Rs31,722

Rs46,610

9%

Rs15,386

Rs23,674

Rs36,425

Rs56,044

10%

Rs16,105

Rs25,937

Rs41,772

Rs67,275

11%

Rs16,851

Rs28,394

Rs47,772

Rs80,623

12%

Rs17,623

Rs31,058

Rs54,736

Rs96,463

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The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law.  IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or  liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon.

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