Understanding The Power Of N & T

In one of the last articles, I had talked about the power of compounding. We saw how the number of turnarounds per period is important than the interest/margin rate that we are getting. Some might still not be able to visualize the power of compounding and would undermine it. Some people still give more importance to the discount or margin or profit that they can get and hold their material for larger profits. It might still be good in markets where the demand is limited. For example, there might not be demand for some article, even if the rates are slashed from, say, 500 to 200. In such markets, people should stick to the margins. 

But there are markets, where demand can increase if the cost of the product comes down. In those markets, the idea should be to lower the margins so more and more products get sold. For individuals, the example of Savings Bank Account & Other investments would be easy to understand. For example, you have Rs. 10000/- in your account. The Savings Account gives you interest in 6 months period. If they give monthly interest, then the same amount will increase after year end. If you invest in mutual fund, then the compounding is  good since your unit price increases daily.

The adjoining formula for Accumulated Amount has 4 elements. Principal is constant. You can vary the r & n and see how the A varies. If you look at the formula, A is very sensitive towards n. The Power of N is very high when compared to the power of r. If you increase the margins or interest by 1 %, it will not make much change to the outcome. But change in N will immediately make you notice the change. Another element in the formula is t. T is the number of years or periods considered. If your compounding is done per year, your n is 1. But for quarterly compounding, it becomes 4. The power of T signifies the value of time. If you start early in your savings or in your business, then the power of T will take you that much farther. 

Understand the formula and apply it in your life. It will help you in long run. We often forget small things in life. And small things can sometimes make big difference.