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
investing
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!
FAQs
The rule says to achieve the goal of earning Rs 1 crore, an investor should invest Rs 15,000 monthly through SIP for 15 years, considering a 15% annual return from an equity fund. Consistent adherence to this strategy can lead to significant wealth accumulation.
How to use the 8 4 3 rule of compounding? ›
Now, as per the 8-4-3 Rule:
- Year 1-8: With a compounded return of 12% on average, your investment might reach approximately Rs 8.36 lakh by the end of year 8. ...
- Years 9-12: The power of compounding kicks in. ...
- Years 13-15: The growth accelerates further.
Meaning of the 15-15-15 rule in Mutual Funds
The 15-15-15 rule for mutual fund investing has three parts to it: The Investment: You should invest Rs 15,000 per month. The Tenure: The total of your investment should be 15 years. It means that you will invest Rs 15,000 every month for the next 15 years.
How much to invest in SIP to get 1 crore in 20 years? ›
If you initially invest Rs 7,500 a month in SIP and increase the amount by 5% every year, you can save Rs 1 crore in 20.3 years (244 months). If you increase it by 10% every year, you can achieve your goal in little less than 18 years (215 months).
How to save $1000000 in 15 years? ›
$1 Million the Easy Way
Putting aside someone's $40,000 in take-home pay every year—and earning that 10% return as described above—will get you to millionaire status in about 15 years. Halve those savings and you're still only looking at 20 years. It will take more work for sure, but it's a lot faster than 51.
What happens if I invest $20,000 a month in SIP for 10 years? ›
Nippon India Small Cap Fund
If someone would have started investing Rs 20,000 monthly 10 years ago in this scheme, the value of their corpus would have been Rs 93.81 lakh in present times. The total investment during the entire period would have been Rs 24 lakh, while the wealth gain would have been Rs 69.81 lakh.
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.
How much to invest to get 1 crore in 10 years? ›
In order to make 1 crore in 10 years, here are the following amount one needs to invest. An individual can invest INR 38,050 to get 15% annual interest. Hence, in 10 years, the amount will be INR 1,0,09,124, and the investor will achieve the target of making 1 crore in 10 years.
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.
What is the 15 15 rule in accounting? ›
What is the 15-15-15 rule? The rule follows a series of three 15s to help investors get 7-figure returns. As per the rule, if you invest ₹15000 per month for 15 years in a fund scheme that offers a 15% interest annually, you can gather ₹1 crore at the end of tenure.
This rule means that you read for 5 minutes without any distractions and thereafter play for 5 minutes. After your 5 minutes play, you again read at a stretch without distractions for 15 minutes and play thereafter for 15 minutes.
What is the 15 5 15 rule? ›
Treatment—The "15-15 Rule"
The 15-15 rule—have 15 grams of carbohydrate to raise your blood glucose and check it after 15 minutes. If it's still below 70 mg/dL, have another serving. Repeat these steps until your blood glucose is at least 70 mg/dL.
How to accumulate 1 crore in 15 years? ›
The famous 15*15*15 Rule states that an investor trying to accumulate Rs 1 crore should consider an SIP of Rs 15,000 per month at 15% for 15 years to get to Rs 1crore. While this approach holds mathematical validity, it may not be suitable for all investors and market conditions.
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 if I invest $5,000 in SIP for 20 years? ›
If someone begins a SIP of 5000 per month for a span of 20 years, at 12% assumed annualized rate of return per annum, your total investment in 20 years is Rs. 12 lakh and the accumulated corpus at the end of tenure is close to Rs. 50 lakhs.
How to grow 1 cr in 5 years? ›
The essential steps to make ₹1 crore in 5 years include setting your financial goals early on, planning your path, investing in Equity Mutual Funds, and doing consistent tax planning. The popular investment options in India include stocks, bonds, ETFs, mutual funds, and ULIPs.
What is the value of 1 CR after 20 years? ›
If we assume an inflation rate of 5%, the worth of Rs 1 crore after 20 years is about Rs 37 lakh! If we assume an inflation rate of 5%, the worth of Rs 1 crore after 15 years is about Rs Rs 48 lakh. The value of 1 Cr in 30 years will decline and become Rs. 23 lakhs due to inflation.
How to accumulate $1 million in 10 years? ›
In order to hit your goal of $1 million in 10 years, SmartAsset's savings calculator estimates that you would need to save around $7,900 per month. This is if you're just putting your money into a high-yield savings account with an average annual percentage yield (APY) of 1.10%.
How to make 10 crore in 10 years? ›
How to accumulate a Rs 10 crore corpus in 10 years? Assuming an expected return rate of 12 per cent per year, an investor would need to invest Rs 4.34 lakh per month in equity funds through SIP to create a corpus of over Rs 10 crore in 10 years.
