Earn while you sleep
Blog about the magic of Compound Interest
My handle is Interest Upon Interest, which is another name for Compound Interest.
Compound Interest is the 8th wonder of the world. Why? Because Compound Interest can transform tiny sums into very, very large sums. We are all taught about Compound Interest in school, but almost never taught it’s true power.
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Compound Interest is like a positive reinforcement loop. The original Principle generates Interest which gets added to the original Principle to become the new Principle which produces even greater Interest which now gets added to the new Principle to produce even more Interest and so on. Hence Interest upon Interest…
There was probably no other person in the whole country who had meditated so much on the question of interest. Margayya’s mind was full of it. Night and day he sat and brooded over it. The more he thought of it the more it seemed to him the greatest wonder of creation. It combined in it the mystery of birth and multiplication. Otherwise how could you account for the fact that a hundred rupees in a savings bank became one hundred and twenty in the course of time? It was something like the ripening of corn. Every rupee, Margayya felt, contained in it the seed of another rupee and the seed in it another seed and so on and on to infinity. It was something like a firmament, endless stars and within each star an endless firmament and within each one further endless … It bordered on mystic perception. It gave him the feeling of being part of an infinite existence.
R. K. Narayan, The Financial Expert, 1952
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9 years ago, I invested a sum of Rs 14 L in the PPFAS Flexi Cap fund and it has grown nearly 5X since then.
But here is something far more powerful which may not be so obvious.
How much work did I have to put in for this? 0. (All the credit goes to the PPFAS team and the magic of Compound Interest.)
Assume that hereon, the returns fall to 15% per annum. So how much would it become 10 years from now? It would grow to about 4 X or Rs 2.74 Cr.
And how much effort would I have to do for that? 0.
So, you see, in a way I am earning even while I am sleeping. Or dancing in my bathroom.
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In most professions, what you earn depends on how much you work. For example, a taxi driver earns only when he drives. When he does not drive, he does not earn. An employee is slightly better off. He gets paid a fixed salary. But look closely and you will find that even there, there is a relationship between hours worked and pay. And once he stops working, he stops earning.
But Compound Interest can keep earning for you while you are working and even after you hang up your boots. For my own children, I have started investing small sums in a mutual fund account for 2 reasons:
To show them how Compound Interest works
The sooner you start and the longer you stay invested, the more you will earn (while you sleep)
Some of my friends on whom Compound Interest divined sooner than it did on me, now earn more through their investments than through their salaries. Sleeping earns them more than their salaries.
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Final words
Compound Interest is the eight wonder of the world. He who knows it, earns from it. He who doesn’t pays for it.
-Einstein
Investing and being patient will work wonders for you as it has done for me and others.