Use compounding to create wealth

The secret of compounding is how you earn more money from the interest on what you have already invested. There are some rules you can adhere to for reaping the maximum benefits of compounding:
Start early, save more: The work you need to do in the beginning is often very painful and tiring, but once your snowball is built, your wealth would attract more wealth.Establish a savings investment budget that will enable you to invest a certain amount of your monthly income (at least 20%). This will help you stick to your investment plan for the long run.
Power of compounding: The longer you leave money invested in a good investment option, the more it will grow due to the compounding effect. Say there are two individuals: Rahul and Priya (names changed). They make disciplined investments and both want to retire at 60. Rahul started investing Rs 1,500 per month when he was 25, and Priya Rs 2,500 per month when she was 30. Assuming a 10% yearly return, both — despite lower contribution by Rahul — will have at 60 almost the same corpus, at Rs 57.4 lakh.

Earn compounding interest, don't pay it: It's important to pay off your debts quickly. High-cost debt like outstanding on credit cards is also compounded. Get rid of credit card debt as this can be your biggest impediment to wealth creation. Assuming a 27% annual interest on unpaid credit card balances, an unpaid Rs 1 lakh at the beginning of the year could turn into over Rs 3-lakh debt by end of the fifth year. Stay away from the activity trap: Research done by a leading global institution on its account holders have shown a couple of stunning outcomes: Among the best performers on their portfolio were people who had forgotten about their investments and, therefore, did nothing about them. Or portfolios where the account holder had passed away and, thus, there were no transactions. Remember that excessive portfolio changes can actually take you away from the objective of increasing your wealth. So monitor your portfolio regularly, rebalance when necessary to achieve the benefits of compounding and increasing your wealth.
(The writer is co-founder, Plan Ahead Wealth Advisors.)