Summary
Learn about the 8-4-3 rule of compounding, where investments double within 8, 4, and 3 years, showcasing exponential growth. It emphasizes staying dedicated to investment plans, guarding against inflation, and adapting to market changes.
In finance, people know that it pays to take interest on interest because this can lead to rapid growth of investments. However, the 8-4-3 guideline is another interesting concept that could show how such a situation looks in practice. You may find out when your investment could start to grow rapidly due to this phenomenon.
Power of Compounding
Essentially, this means that you will be earning on both your investments and their reinvestments. Supposing that you invested ₹10,000 p.a. at the rate of 9%; it means that it grows ₹900 in returns earned. If this amount is withdrawn instead of being reinvested, then in the second year you will gain 10,900 x 0.09 = ₹981. This trend goes on and on until one ends up with a lump sum. To grow more exponentially, it is better the longer you invest. Getting started early and increasing contributions regularly demonstrate compounding’s incredible potential to make wealth grow exponentially.
What is the 8-4-3 rule of compounding?
The rule of 8-4-3 when it comes to compounding indicates a style of investment that accelerates growth with time. Initially, a corpus doubles within 8 years through an average annual return of 12% subsequently another doubling happens for the same period after another 4 years following its initial setting up. Eventually, this would be seen within 15 years as its value doubled again after 3 more years. This intertwined influence highlights the extent to which an ongoing compounding growth will build up wealth magnitudes more rapidly with time.
To maximize your chance of high savings in the future, take post-tax returns into account for long-term capital gains when making investments. It also means how compound interest helps one create wealth since it seems as if reinvested earnings consistently generate exponential growth just as when rolling a snowball uphill.
How does the 8-4-3 rule of compounding work?
For instance, if you invest a lump sum of ₹10,000 every month in an instrument that earns 12% interest per annum and is compounded yearly, you will get your first ₹16,15,266 lakh in eight years.
Here comes the magic of compounding. It will take only half the time, i.e., four years, for the next ₹16 lakh. To save the third ₹16.15 lakh, it will take you only three years. So, in 15 years, you can save ₹50 lakhs.
At the end of the 21st year, you will save ₹1 crore, it takes only 5 years to double your ₹50 lakhs to ₹1 crore.
Do keep in mind here that we take annual compounding, that is interest is calculated once a year.
| The table illustrates the 8-4-3 rule of compounding | |
|---|
| Expected return | 12% |
| Monthly SIP amount | ₹ 10,000 |
| Corpus after 8 years | ₹ 16,15,266 |
| Corpus after next 4 years (Total 12 years) | ₹ 32,22,521 |
| Corpus after next 3 years (Total 15 years) | ₹ 50,45,759 |
Benefits of 8-4-3 rule of compounding
Staying on Track with Investments
Have you ever heard about the 8-4-3 Rule? This is like a trusted guide that can enable a person to adhere to his investment plan for many years. The most important thing here is to be dedicated. It implies that you are supposed to adhere to your strategy no matter how volatile the market may sometimes be. Through this way, emotions are kept at bay and one will remain focused on what he wants to achieve.
Guarding Against Inflation
Just think of your investments as a shield to defend you against inflation. They are effectively protected from the deteriorating impacts of increasing prices by this annual 5% growth rate, which assures that their actual returns can continue to purchase the same values even over time thus safeguarding your financial stability.
Adapting to Market Changes
Compare your investment portfolio to a garden that demands regular care. Regular check-ins imply that we give ourselves power for making informed choices. And through this dynamic methodology, you can fine tune it by matching the changing market conditions with the current trends. This is all rooted in minimizing risks as well as taking advantage of chances that come up.
Knowing well the 8-4-3 principle allows an insight into the possibilities of consistent investments that proliferate. Thus, it is possible for an investor to safeguard against inflation, reduce risk and capitalize on markets through following it in making long term investments. Key to this criterion is taking time to amass wealth by being patient while remaining disciplined regardless of the market condition.
FAQs
The rule of 8-4-3 when it comes to compounding indicates a style of investment that accelerates growth with time. Initially, a corpus doubles within 8 years through an average annual return of 12% subsequently another doubling happens for the same period after another 4 years following its initial setting up.
What if I invest 10,000 RS in SIP for 20 years? ›
At the end of the 20th year of your investment, your corpus will reach around Rs 1 crore. If you continue this investment for another 10 years, or a total of 30 years, your wealth will grow much faster.
What is rule 72 in finance? ›
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
What is the SIP for 10000 for 15 years? ›
So, assuming an investor invests ₹10,000 per month for 15 years, maintaining 10 per cent annual step up, mutual funds SIP calculator suggests that one's SIP of ₹10,000 would yield ₹1,03,11,841 or ₹1.03 crore.
How long will it take for $10000 to double at 8 compound interest? ›
For example, if an investment scheme promises an 8% annual compounded rate of return, it will take approximately nine years (72 / 8 = 9) to double the invested money.
What is the golden rule of compounding? ›
The earlier you invest, the more time your money has to grow into a nice sum. Starting early takes advantage of compound interest — the name given to the returns you make on money that you previously earned as interest. In other words, your money earns returns on its returns.
How to get 50 lakhs in 5 years with SIP? ›
For example, if an individual plan to accumulate ₹50 lakhs over the tenure of 5 years, assuming the individual invests in a Flexicap fund or a Multicap fund which is giving an annualized return of 15%, then the individual needs to invest ₹55,750 per month for 5 years in order to generate the required corpus.
What happens if I invest $15,000 a month in SIP for 15 years? ›
Consider investing Rs 15,000 per month for 15 years and earning 15% returns. After 15 years, the total wealth will be Rs 1,00,27,601 (Rs. 1 crore). According to the compounding principle, if we implement these very same returns and contributions for another 15 years, the amount we accumulate grows enormously.
What happens if I invest $1,000 in SIP for 30 years? ›
If you were to invest Rs 1,000 per month into an equity SIP over a span of 30 years at 12 per cent per annum, you would have invested only Rs 3.6 lakhs. However, your portfolio's value would have grown to an impressive Rs 34.9 lakhs.
What is Rule 78 in financing? ›
Under the Rule of 78, a lender weighs interest payments in reverse order, with more weight given to the earlier months of the loan's repayment period. According to this rule, if you took out a 12-month loan with a total interest charge of $2,000, this is how much you'd pay in interest each month.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
How long will it take to increase a $2200 investment to $10,000 if the interest rate is 6.5 percent? ›
Final answer:
It will take approximately 15.27 years to increase the $2,200 investment to $10,000 at an annual interest rate of 6.5%.
What happens if I invest 20 000 a month in SIP for 5 years? ›
Value of INR 20,000 per Month in SIP
If an investor invests INR 20,000 per month for a period of 5 years, he will be able to earn INR 17 lakh as the overall income generated from SIP. The total investment in the tenure of 5 years will be only INR 12 lakh.
How much is $5000 for 5 years in SIP? ›
How much is Rs. 5,000 for 5 years in SIP? If you invest Rs. 5,000 per month through SIP for 5 years, assuming 12% return. The estimate total returns will be Rs. 1,12,432 and the estimate future value of your investment will be Rs. 4,12,431.
How much is 50000 monthly SIP for 5 years? ›
How much is Rs.50,000 per month SIP for 5 years? If you invest Rs. 50,000 per month in a SIP for 5 years, the total investment would amount to Rs. 30 lakhs. Assuming an average annual return of 12%, the estimated corpus at the end of 5 years would be approximately Rs. 40.6 lakhs.
How to quickly save RS 1 crore use this 8 4 3 rule of compounding? ›
With an average annual return of 8%, your money would double to Rs 25 lakhs in approximately 8 years. In the next 8 years, it would quadruple to Rs 1 crore. This follows the 8-4-3 rule precisely—8 years to double, 16 years to quadruple, and 24 years to reach 8 times the initial amount.
What is the 69 rule in compound interest? ›
The Rule of 69 is a simple calculation to estimate the time needed for an investment to double if you know the interest rate and if the interest is compound. For example, if a real estate investor can earn twenty percent on an investment, they divide 69 by the 20 percent return and add 0.35 to the result.
What are the rules of compounding? ›
The Rule of 72 is a heuristic used to estimate how long an investment or savings will double in value if there is compound interest (or compounding returns). The rule states that the number of years it will take to double is 72 divided by the interest rate.
How much money invested at 5% compounded continuously for 3 years will result in $820? ›
Therefore, investing $701.54 at 5% compounded continuously for 3 years will result in $820. Personal 1-on-1 Live Tutoring with our dedicated Certified Experts.
