Compounding Effect

The Compounding Effect: Why Small Actions Matter More Than You Think

Last weekend, I caught up with an old friend after years. At first glance, I almost didn’t recognize him; he looked quite different from how I remembered. Over coffee, as we talked about college days, our chat naturally drifted to health and lifestyle.

He shared something interesting: years ago, he had started having a “special health drink” every day after lunch. It began as a stress-buster at work, also made him feel better. But over time, this little habit grew into something that wasn’t serving him well anymore. Despite his doctor’s advice, he now finds it difficult to stop.

Our conversation reminded me of a powerful truth that tiny actions, repeated daily, can compound into life-changing results. This doesn’t just apply to health or habits; it’s the very same principle that drives wealth creation too.

The Magic of Compounding in Money

Compounding is often called the “8th wonder of the world.”.  In my experience of working with people in wealth creation, I have seen this wonder in action! I have seen that it quietly turns small, consistent efforts into extraordinary outcomes over time.

Simply put, compounding means earning returns on returns (be it an impact on health or interest earned through an investment). Unlike simple interest, which applies only to the initial investment, compound interest snowballs because every bit of growth also starts earning more growth.

It is slow at first, but with time, it becomes unstoppable.

Why Starting Early is Better Than Investing More Later

When my customers in their 40s talk to me about creating wealth quickly, I narrate this story to them.

Ajay and Vijay are from Bangalore and have started working at the age of 25.

  • Ajay starts investing ₹5,000 per month from age 25 to 35 (investment period of 10 years) and then stops. But keeps the money invested for further growth.
  • Vijay starts later, at 35, and invests ₹5,000 per month until 55 (investment period of 20 years).

Assuming both earn 12% CAGR, at the age 55, guess who has more?

  • Ajay invested only ₹6 lakhs in total, but his money grew to 1.2 crore.
  • Vijay invested ₹12 lakhs, double the amount, but ended up with only 49 lakhs.

Why this huge difference? Time!!!

Even though Vijay invested twice as much, Ajay ended up with more because compounding had more time (an extra 10 years) to work its magic.

You Don’t Need a Fortune to Start

The beauty of compounding is that even small investments done regularly, can create wealth.

For instance, investing just ₹3,000 a month (that works out to just ₹100 a day) at 12% CAGR can grow into:

  • 6.97 lakhs in 10 years
  • 29.97 lakhs in 20 years
  • 1.05 crore in 30 years

It’s not about how much we start with. It’s about when we start and how consistently we stay the course.

One of the biggest mistakes we make with investing is that we expect instant results. Compounding doesn’t work in the short term. Compounding is the game of patience where the winner is the person who sticks through market ups and downs.

Patience and Consistency Are Non-Negotiable

Most people lose patience because compounding feels slow in the beginning. But wealth creation is not a sprint. It is a marathon.

Take this example:

  • Aryan, 30 yrs old, decides to invest ₹5,000 every month for 20 years and stays disciplined. His ₹12 lakh investment (over 20 years) at 12% average returns (CAGR) grows to about 50 lakhs.
  • Abhi, 30 yrs old, also starts investing at the same time but gets impatient after 2 years and stops contributing. Later, he realises his mistake and restarts his investment again after a gap of 5 years. He ends up investing ₹9 lakhs in total, and at same 12% average returns (CAGR) his money grows to just 30 lakhs.

Missing a few years might not sound like a big deal, but the opportunity loss is almost half the final wealth! That’s the cost of inconsistency.

The Compounding Effect Beyond Money

The principle of compounding doesn’t stop with investments. It applies to everything, your health, career, skills, and relationships. Tiny daily efforts, reading a few pages, exercising for 20 minutes, practicing gratitude, may feel insignificant in the moment. But given time, they transform our lives.

My friend is now trying to break free from his old habit, and I have helped him stay away from that daily drink for a week. Just as building the habit took years, unlearning it will take time too. And that’s perfectly okay!

Final Thought

Compounding is slow, but it is certain. The earlier you begin, the lesser is the effort needed to reach your goals. Don’t wait for the ‘perfect time’ to invest or to start a new habit.

The best time was yesterday. The second-best time is today!!!

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