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How Compound Interest Helps with Retirement Planning

By Finserv MARKETS - Aug 13,2019
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“Power of Compounding” With A ULIP Plan

Do you wish to make money by putting in less effort? Anyone would. However, the key effort is investment. The earlier you start to invest, the more likely it is that that you would end up making more money. The simple way to accomplish smart investing is by learning how you can make your money work efficiently for you. This concept, known as compounding, can help you increase your wealth exponentially over a period of time.

What is compounding?

Reinvestment of income to generate additional income over time is known as compounding. In such investments, you earn interest on the original rate of interest itself. This magnifies the return you earn on the entire investment. Compounding is a norm amongst those aware of how to secure savings and prepare for retirement planning. Sounds important? Starting to invest for the future is one of the best financial decisions you can take. ULIPs offer savings and act as investment plans that help you grow your money and ensure your family manages life-long sustenance. Let us look at the power of compounding and how to invest for future planning. How Compound Interest Helps with Retirement Planning

How compounding works

Compounding is a smart way to create wealth as long as you have time on your side. As your returns or interest start earning more, the profit of your investment begins to increase at a faster pace. Most beginner investors believe compounding is a tricky concept and do not wish to understand it. But it can be very easily understood.

Power of compounding

Virat invests Rs. 10,000 at 8% per annum. This implies that the interest for the year would be Rs. 800. When the interest is reinvested into the same investment, the earnings for the following year would accumulate on the original amount of Rs. 10,000 as well as on the additional investment of Rs. 800. Therefore, the earnings for the second year would be Rs. 864. As time goes by, the interest for each year keeps increasing since there is an added investment every year.

Curious to know the amount of money accumulated after a certain time period once the returns are reinvested? Let’s see how.

Investment: Rs. 1,00,000

Rate of return: 8% per annum

The table above displays an exciting pattern. It shows that the longer an investment is held, the faster the earnings grow. Hence, the power of compounding proves that earnings do not just multiply, but grow exponentially with time. It is the process of earning income on your principal investment plus the income earned through reinvestment.

 How Compound Interest Helps with Retirement Planning

Key rules of investment that give you the best out of compounding

  • Begin early

There is no alternative to investing in a plan as early as possible. You must plan on how to invest for future ideally at a young age as this is when you are free from liability in terms of dependents and have the potential for a higher risk appetite. You can choose to invest in ULIP plans that have a higher exposure in equities, which means more risks when the market gets volatile. However, when there is a risk, there is a reward too. Unit linked insurance plans keep you floating even in volatile market conditions. ULIPs allow you to switch from one particular fund option to another as per market movements and outlook. Many ULIPs allow you innumerable number of switches free of charge for availing the facility, unlike other market instruments.

  • Be patient

As investors, we wish for quick returns and do not realise that long-term investments gain massively through the power of compounding. It is advisable to allow your investment to grow without meddling with it from time to time. Years of dedicated investment will supply you with a healthy lump sum for you after a considerable period. The lock-in period of 5 years, for ULIPs, gives you enough time for your funds to compound and grow your wealth compounds over time. If you are confused about how to invest for future planning, you can go through the eight funds and four investment strategies offered by Bajaj Allianz Goal Assure that aims to smoothen the path to your life goals. This plan comes with Loyalty Additions payable from the sixth year and a Fund Booster payable at maturity.

  • Have discipline

It is important to define your financial goals, invest regularly and realise that long-term investments supply you with a healthy lump sum over a considerable period. You should allow your investment to grow at its own pace without meddling with it from time to time. Years of dedicated investment will show you the power of compounding. Bajaj Allianz Future Gain, available on Finserv MARKETS, enables you to make the most of your investment through ULIP tax benefits, making it a must-have in your investment portfolio. It ensures that you continue your journey towards your financial goals without any hindrance.

Conclusion

Inculcation a savings habit from the beginning of your career will help reduce the burden of a higher monthly contribution towards your financial goals later in life. It is wise to take advantage of time on your side and invest in ULIP plans that helps you reach your retirement goals comfortably through the power of compounding.

To know more on ULIP investments in depth, you can check out these blogs:

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