Most of us would have heard stories relating to the “Power of Compounding” from different writers of the investment world and the part played by “compounding” in the path towards achieving Financial Independence. Many of us must have heard of only “Positive” compounding. Well, what do you think of Borrowings, inflation, etc.
COMPOUNDING is directly related to the time period. More the time period, greater is the effect.
Is not borrowing and paying interest over a LONG period of time a NEGATIVE COMPOUNDER. So, think twice whenever a loan is about to be taken. You will have to pay the PRINCIPAL as well as INTEREST which is compounded negatively against your WEALTH. You will be indirectly working for the bank/person who has given you the loan to pay the interest. Where it is absolutely essential to go in for a loan, try to pay off the loan at the earliest.
Inflation over a long period of time is a WEALTH DESTROYER. If you keep your money in a Savings account for a prolonged period of time, the inflation rate will reduce the purchasing power of your money in your bank account. Park your funds in an instrument which yields a rate atleast on par with the rate of inflation. I assume that you should have already known that only a minimum amount of fund is to be parked in a savings account. It is a silent killer. Beware.
LOW RATES OF RETURN
Assume for example, if a savings account yields 3% per annum, fixed deposit yields 6% per annum, a provident Fund yields 7.5% per annum, debt funds yield 8.5% per annum, Index ETFs yield 10% and inflation is 7%, and if moneys invested in an instrument well over long periods of time which yields at low rate, does it not inhibits the growth of wealth.
Well, in India you have the incentive of deducting savings in specified instruments upto certain limits from income before calculation of Income Tax. You will also be taxed on certain incomes like interest on fixed deposits, dividend income in excess of certain limit, capital gains, etc depending on your income limit. Not taking into consideration of these factors will also inhibit the growth of wealth.
BEWARE of the NEGATIVE compounders too.