Once there was a king who was very kind. He was renowned for keeping his words and helping the scholars for their wisdom and knowledge. There was a poor poet who came to know about his generosity and came to meet him. He had written a poem which had very high literary quality. The King was impressed and asked the poor poet for reward he wanted for his literary work. The poet pointed towards a chess board which was lying there and asked to place 1 grain of rice on the 1st box of the chessboard, 2 on the 2nd box, 4 on the 3rd box, 8 on the 4th box, 16 on 5th box and double the no. of rice grains till 64th box. The king was surprised to know on his demand and asked the poet to demand something else as this was a petty demand. But the poet insisted on putting the rice grains on the chess board.
The king ordered his servants to start putting rice grains on the chess board as per poet’s demand. The servants started putting the grains on the chess. On 20th box the no. of grains was 524,288, on 25th it was 16,777,216, on 30th the no. was 536,870,912, on 35th the no. was 17,179,869,184. On 40th the no. was 549,755,813,888. On 45th the no. was 17,592,186,044,416. On 50th the no. was 562,949,953,421,312. On 55th the no. was 18,014,398,509,482,000. On 60th the no. was 576,460,752,303,423,000 and on 64th the total was 9,223,372,036,854,780,000.
The total number of rice grains which the poet won was astonishing 18,446,744,073,709,600,000. This was something which was out of the means of the king. To keep his words to the poet the king handed over his kingdom to the poet and went for meditation in the forest.
This is an ancient story which explains the wonder power of compounding can do if one starts investing early, invests regularly and sticks to his investments for a longer period of time. Albert Einstein once noted that the most powerful force in the universe is not the gravitational force but the power of compounding. He even said, “The power of compounding is the 8th wonder of the world”.
I am sure you must be wondering about compound Interest and what Compounding- The 8th Wonder can do to your investments.
Compound Interest is an interest which is added to the principal amount and the added interest start earning interest. The addition of interest to the principal is called compounding. For example your investment of Rs. 1000/- per year with a rate of interest of 10% would become Rs. 1100/- at the end of 1st year and at the end of 2nd year it would become Rs. 1210/-. This difference may look very small if you compare it with simple interest (which will be Rs. 1200/- after 2 years @ 10% rate of interest). But remember even the no. was small when the servants were putting rice grains on the chess board but eventually compounding made all the difference and the king lost his kingdom.
To get more clarity on the power of compounding let me give you an example of two friends Amit and Satish. They both started working at the age of 25 at a same salary package.
Scenario-1 (Assuming RoI @ 15% per annum)
Amit starts investing at the age of 25 and invests Rs. 5000/- per month till his retirement at the age of 60. He will get an amount of Rs. 5.70 Crore
Satish starts investing at the age of 35 and he invests Rs. 10000/- per month till his retirement at the age of 60. He will get an amount of Rs. 2.77 Crore
Scenario-2 (Assuming RoI @ 15% per annum)
Amit starts investing Rs. 5,000/- per month at the age of 25 and keeps investing for next 15 years. He does not take his money out till his retirement age of 60. He will get an amount of Rs. 5 Crore
Satish starts investing at the age of 35 and invests Rs. 10,000/- per month till for next 25 years that is till he’s 60 years of age. He will get an amount of Rs. 2.77 Crore
Scenario- 3 (Assuming RoI @ 15% per annum)
Amit starts investing at the age of 25 and invests Rs. 5,000/- per month till his retirement at the age of 60. He will get an amount of Rs. 5.70 Crore
Satish starts investing at the age of 45 and he invests Rs. 50,000/- per month till his retirement at the age of 60. He will get an amount of Rs. 3.07 Crore
The power of compounding is the secret behind the great returns for long term investments. If you have the patience and if you can save and invest, then the power of compounding can do wonders to the investments made. If you have not started investing yet, you can start investing now and can still make good corpus for your retirement.
In my next post I’ll share the different avenues of investment.
Stay tuned and Happy Reading !!