If a child pesters his father for money, his usual retort would be, “Do you think I’m out there shaking a money tree.”
Yes, in a way, he is right, you can’t just pluck money off a tree. But even a small penny is like a seemingly small seed, which when nurtured and nourished carefully, can be the beginning of a forest.
Power of compounding
In the world of finance, there is one such seed, which not only grows into a tree but could become an entire forest — the power of compounding. The magic of compounding is that it starts small but grows exponentially over time.
More than two centuries ago, Benjamin Franklin, the first Postmaster-General of the United States and author of the book Poor Richard’s Almanack, echoed this concept saying, “Money makes money. “And the money that money makes, makes money.”
Further, highlighting its potential of exponential wealth creation in the long run, famous physicist Albert Einstein said, “compound interest is the eighth wonder of the world.”
Though the phrase “the compound effect” existed for aeons, especially in mathematics, it became quite popular in the realm of finance, productivity and personal development after a bestselling book by U.S. author Darren Hardy.
Compound effect
The compound effect is like a snowballing effect wherein a small, consistent action or an investment accumulates over a period, leading to an exponential growth. In personal finance, it refers to the process wherein your initial invested money earns interest, and the interest earned earns interest, which subsequently generates interest, and the chain goes on and on.
This way, you make a gigantic leap from your original invested amount. Not just this, the beauty of the compound effect is that you need not work hard for it, as even if you are sleeping, your invested money will silently work and keep on generating money for you.
You need to give time for it and just be patient. Consistency is the key.
Let’s imagine this scenario. God wishes to give a boon and places two choices before you. First – He will clear all your debts instantly, say ₹35,00,000.
Second – He will give you ₹1 on the first day with a promise that it will double every day for one month. So, which one do you choose?
Almost all 10 people would only choose the first option for two reasons. The first being instant gratification and the second is the lack of awareness of compounding effects.
In contrast, mathematicians or financial experts will only choose the second option of taking the ₹1 that doubles every day for 30 days. They do not mind waiting for 30 days, let’s find out why.
Money doubles
On day one, God gives you ₹1, it doubles to ₹2 on the second day, to ₹4 on the third day. Likewise, it doubles to ₹512 on the 10th day. Your patience is being tested here.
In a similar doubling strategy, your money becomes ₹16,384 on the 15th day. Time is the secret; time begets money.
On day 20, it would be ₹5,24,288, which is way less from the first choice. But wait, we have 10 more days. On day 24, it would have doubled to ₹83,88,608 and on the last day, it would be ₹53,68,70,912.
In just 30 days, ₹1 transforms into a whopping sum of more than ₹53 crore. You call it mind blowing but that’s the power of compounding.
SIP investment
Now, let’s take a real-life example. Priya invests ₹1,000 every month in a Systematic Investment Plan (SIP) that gives her 12% Compound Annual Growth Rate (CAGR).
After five years, her investment would have grown to almost ₹82,000. After 10 years, it becomes ₹2,32,000 (approximately) and after 20 years ₹9,99,000.
But wait, the magic has not happened yet. In 30 years, it becomes ₹35,29,000 and in 40 years, a whopping sum of more than a ₹1 crore.
So, just a ₹1,000 in monthly SIP transforms into more than a ₹1 crore in 40 years.
That’s the reason all financial experts advise us to start saving right from the first salary, so that, by the time you retire, you would have saved enough, and your money would have worked for you even when you were sleeping.
If you need more money, just step up your SIP amount of ₹1,000 per month by just 10% every year, witness the magic and enjoy your retirement life comfortably and worry-free. Start saving early.
(The writer is an NISM & CRISIL-certified Wealth Manager)
Published – July 21, 2025 06:02 am IST