Compounding is a powerful financial concept that can help with wealth accumulation over time, including in Sri Lanka. It works by reinvesting the earnings (interest or returns) on an investment, allowing your money to grow exponentially rather than linearly.
Compounding applies to various financial instruments available in Sri Lanka, such as:
- Fixed Deposits (FDs) – Interest can be compounded monthly, quarterly, or annually.
- Savings Accounts – Some banks offer compounding interest on savings accounts.
- Stock Market Investments – Reinvesting dividends in stocks can help compound wealth.
- Unit Trusts & Mutual Funds – Returns earned can be reinvested for further growth.
- EPF & ETF (Retirement Funds) – These funds earn interest and dividends, which grow over time.
The Magic of Compounding
The power of compounding lies in the fact that you earn returns on both:
- Your initial investment (principal)
- The accumulated returns (interest or profit) from previous periods
Over time, this results in exponential growth, rather than simple growth.
Example of Compounding in Sri Lanka
Let’s say you invest LKR 100,000 in a fixed deposit at 10% annual interest, compounded annually.
Year 1: LKR 100,000 + (10% of 100,000) = LKR 110,000
Year 2: LKR 110,000 + (10% of 110,000) = LKR 121,000
Year 3 : LKR 121,000 + (10% of 121,000) = LKR 133,100
Instead of simply earning LKR 10,000 every year, you earn more each year because the interest is added to the previous year’s balance.FIRE
Formula for Compound Interest
The compound interest formula is:
A = P (1 + r/n)nt
Where:
A = Final amount
P = Principal amount
r = Annual interest rate (as a decimal)
n = Number of times interest is compounded per year
t = Number of years
Why Compounding is a Wealth Magic Formula
- Works best with time – The longer you invest, the greater the impact.
- Requires patience & discipline – Small, consistent investments grow massively.
- Beats inflation – Helps keep your money’s purchasing power strong.
- Passive growth – Your money works for you, even when you’re not working.
Final Thoughts
Yes, compounding is one of the best strategies for wealth accumulation in Sri Lanka (and anywhere in the world). The key is starting early, reinvesting returns, and being consistent in your investments.
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