Simple interest is calculated on the principal or original amount invested every time. But, in the case of compound interest, it is earned on both principal and interest.
The rule of 8-4-3 is used to determine how soon we can double our money. It is useful to know this to evaluate long-term investment opportunities or for retirement planning. How soon we can double the money is also dependent on the interest rate and other factors such as the rate of inflation and applicable taxes.
As per this thumb rule, the first 8 years is a period where money grows steadily, the next 4 years is where it accelerates and the next 3 years is where the snowball effect takes place.
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Let’s take a look at how the 8-4-3 rule works:
For example, if we invest Rs 21250 every month at an annual interest rate of 12% for the next 15 years, we will accumulate Rs 1 crore by the end of the period!
Rs 21,250 invested every month for the first 8 years, will lead to a corpus of Rs 34.3 lakhs. In the next 4 years, i.e., in half the period, the corpus will become 68.5 lakhs with the effect of compounding. And in just the next 3 years, a target of over 1 crore will be hit. To conclude, 8-4-3 is an easy-to-use, invaluable compass to plan and evaluate investments for long-term financial goals. It simplifies the profound impact of the principle of compounding on wealth creation.
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