The power of compounding!

By BankBazaar | April 17, 2011

Not many people realize the significance of this term. Compounding interest can help you earn better returns in future since; it is your interest that earns interest. When following this pursuit, it is very important to keep in mind that, compounding, will show returns only in the long term period but not in the short term.

So, it is important for you to not change your mind if you see a meager change in the balances after a span of 9-12 months. Let the balances rest for some time, where in the increase can be guaranteed.

The basic step for compounding is to link it to your long term goals. If you are a single and plan to get married in the next 3-5 years and plan on to buy a house and a car etc, these will be your long term goals. If you can invest 40% of your 50% savings in equities and make sure to track their rate of returns, then your chances of building a good corpus can be guaranteed.

Try to not get tempted by the hour and make hasty purchases where in you increase your loan amount on your credit card, avail a personal loan to meet your requirements etc. Plan wisely for all your financial requirements so that you can avoid the trouble of getting into debt trap. Even if you have liabilities over head, make sure you continue with your savings procedure, provided that you gather enough funds for prepaying the loan amount to reduce your debt burden.

Ideally look at mutual funds instead of direct stocks. Have two-three funds in the debt asset class, one fund in hybrid and another two in the equity basket. Use systematic investment plans for the same. Remember, as your age increases, your responsibilities along with your experience also increases. So, make sure you religiously, set aside 40% of your salary into investments at any point in your career. Doing so, a strong and a balanced portfolio is what you will earn.

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