The
8-4-3 rule of compounding
is a guideline that suggests how much money you need to invest each month to achieve a specific corpus over a given period, assuming a certain rate of return. Here are some basic rules of
to build a good corpus
Start investing early: The earlier you start investing, the more time your money has to grow through compounding.
Invest regularly: The key to
compounding
is regular, disciplined investments. Even if you start late, consistent investments can help you reach your goal.
Leverage the power of compounding: Compounding means that your initial investment earns returns, and those
returns
also earn returns, leading to exponential growth over time. The longer you stay invested, the more powerful the compounding effect becomes.
Choose the right investment vehicles: To achieve the assumed returns (typically 10-12% per annum), you need to invest in growth-oriented instruments like
equity
mutual funds, which have the potential to generate higher returns over the long term, albeit with higher risk.
Adjust for inflation: While the rule provides a simple guideline, it's essential to consider inflation and adjust your investment amounts accordingly. The target corpus of Rs 1 crore may need to be higher to account for the rising cost of living over time.
ET breaks it down to explore how you can build a corpus of Rs 1 crore using this rule.
1. Understanding Compounding:
Simple Interest: When you invest money, simple interest is calculated only on the principal amount (the initial investment).
Compound Interest: In contrast, compound interest is calculated on both the principal amount and the interest earned on it. This means you earn interest on previously accumulated interest.
2.The 8-4-3 rule explained:
- You can follow this rule to systematically grow your money:
- 8% of Your Income: Allocate 8% of your
income
towards investments.
- 4% Return: Aim for an annual return of 4% on your investments.
- Reinvest for 3 Decades: Continue reinvesting your returns for a period of 30 years.
3. Example Illustration:
- Let's say you invest a lump sum of Rs 21,250 every month in an instrument that earns **12% interest per annum** compounded yearly.
- Here's how your corpus grows:
- After 8 years: You'll have approximately Rs 33.37 lakh.
- After the next 4 years (total 12 years): Your corpus will reach Rs 66.24 lah.
- After the next 3 years (total 15 years): You'll achieve the coveted Rs 1 crore milestone
- By the 21st year, your savings will grow to Rs 2.22 crore.
- And by the 22nd year, you'll need just one more year to accumulate another Rs 33 lakh due to the magic of compounding.
Equity SIPs and good return
Consider investing in equity systematic investment plans (SIPs). Historically, they have delivered good returns.
Remember, consistency, discipline, and the power of compounding can help you achieve your financial goals. Start early, stay invested, and let time work its magic!
