Learn What Is Compounding Rate Of Return In Minutes!
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Learn what is compounding rate of return in minutes!

(Simple) Interest is money you can earn by initially investing some money (the principal). A percentage (the interest) of the principal is added to the principal, making your initial investment grow!

But, what is compounding rate of return or compounding interest in layman term? What is the annual compounding interest formula? And...most important of all...how to benefit from knowing the power of compounding interest?

Hi everyone, welcome to Keys Value Investing! Today, we are going to find out exactly what is compounding rate of return in both...layman and value investor point of view!

Let's Find Out what is compounding rate of return

What is compounding interest or compounding rate of return actually?

Compounding rate of return is defined as the interest which is calculated not only on the initial principal but also the accumulated interest of prior periods. Compound interest differs from simple interest in that simple interest is calculated solely as a percentage of the principal sum.

How to calculate compounding rate of return...the easiest way?

Simple.

Compounding rate of return = Initial capital X ((1+(Compound interest / 100))^Number of years

Example:-

Say you're 30 now, and planning for retirement by the age of 60. And... you intended to invest $10,000 from your hard-earned saving until 30 years from now (for retirement) at 20% annual compounding interest.

Here's how it works:-

Compounding rate of return = $10,000 X ((1+(20/100))^30

= $ 10,000 X 1.2^30

= $2,373,763.14

That is almost $2.4 million by the time you retired.

Simple? Yes. But it is NOT easy. Because it takes discipline, hard work and most important of all...the RIGHT SKILLS to achieve this.

The GOOD news is: It only takes you few simple lessons and rules to master the SKILLS. Trust your self. It is NOT difficult at all. And it is boring! LOL

Throughout years of "ups and downs", I have learned that, the KEYS of most DIFFICULT "skills" are NOT the technical or fundamental of value investing...but to de-learn the WRONG habits, and psychological weaknesses. (I will show you how in Keys Value Investing site)

Let's move on...

How compounding rate of return can benefit us?

Knowing "how to calculate compounding rate of return" or "what is the formula of compounding interest" is NOT enough. You got to know WHY and HOW it BENEFITED us!

Here's how:-

DOUBLE your money in EVERY few years. With 20% compounding interest (mentioned above), you actually DOUBLE your money EVERY 4 years. In other words, your initial $10,000 become $60,000++ after 10th-year. And $60,000++ become $370,000++ by the 20th year. And $370,000++ become $2.4 million.

The (initial) money DOUBLE every 4-years.

What's next?

Just be consistent, and learn all HOW value-investor did it. Copy exactly their skills and habits. Develop your unique investment philosophy (mentioned in 7-Habits of Value Investor and How To Become A Competent Value Investor)

Conclusion:

Today, we have walked through what is compounding interest, how to calculate compounding rate of return and the importance of compounding interest or how it benefited us in value investing. All we have to do now is to decide whether to start learning how a billionaire investor like Warren Buffett has utilized the compounding interest for more than half-decade in accumulating his wealth to whole new level.

Stay tuned, and see you around in my next session of sharing in Keys Value Investing.

If you ever need any feedback or support regarding with the investing know-how and brainstorming discussion, I would be more than happy to connect. Simply leave your comments below and make sure you visit my site regularly as I am always updating it with lots of “A-ha” ideas and information that I come across and I guaranteed that you will find interesting.

Posted by Mike.


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