Jan 11, 2018 4 min read

# Don’t Underestimate the Power of Compounding!

Now this is again a shocking fact!!! You might have never heard it before.
You might have already heard many times about the superiority and benefits of the compound interest, and also that Albert Einstein called it the eighth wonder of the world. But, what you have missed knowing about it is all that we have covered today in this write-up. Read until the end; you will encounter too many amazing facts about compounding that you might have never known.

Let’s begin with an ancient tale of the chessboard and the rice grain:

Thousands and hundreds of years ago, there was a king in India. He used to love playing games, but often get bored of what all he had that time. He wanted to play some new games, something more challenging. Thus, he commissioned a poor mathematician to come up with a new game which could help him entertain. After days and months, the mathematician came up with a new game which was named as Chaturanga. It is equivalent to something what we call as chess today. The king loved the game so much that he asked the poor mathematician to ask for anything he wants and that thing will be a gift from the king to the poor mathematician. The poor man made his wish and said, “I want one grain of rice for the first square on the board, two for the second square, four grains for the third one, sixteen for the fourth one, and so on. The poor man wanted that double the rice grain in each next square than what is there in the previous square. The king was somehow confused and amazed. He asked the person, “you could have wished for golds or silvers, why did you call for rice grain?” The poor person replied, “the rice grain would be sufficient for me.” After this, the king ordered his pawns to lay the grains of rice in the squares. The king thought that it would take hardly some moments and his pawns will fill in all the squares with the rice grains as required. But soon after the 10th square, he realised that it's not that easy. There is a great trick behind. The time they reached the 20th square, the king realised that his entire wealth would not be sufficient to buy the amount of rice needed on the 64th square. The king was really shocked that how simple the wish was when the mathematician asked for it. The whole rice of his kingdom was exhausted before the 30th square.

The king was somewhat disappointed and also amazed at the great mathematics trick by the poor man. He said, “you provided me with such a brilliant game, and I cannot fulfil your simple wish.”

Whatsoever, the king was unable to fill in the rice in the squares of the chessboard, and the clever mathematician did not get his wish fulfilled. But, in between the process, he gave us the power of compounding.

Yes, this is what the power of compounding can do. If the concept is still foggy in your mind, then here’s one more trail to help you comprehend it.

This time let’s make a practical approach. Suppose you have started a resolution to save some money from February 1. You decided to save in a manner that Rs. 1 on the first day, Rs. 2 on the 2nd Feb, Rs. 4 on the 3rd, and so on. It means you decided to put aside double each day than what you have saved the previous day.

So, what do you think that how much it will take to have Rs. 1 billion?

Did you say 100 years, ten, or no idea?

Starting with one rupee and doubling it every day to create billions of rupees will take, to be very precise, only 28 days to become a billion rupees corpus.

Amazed?

Here’s more! If this February is a leap year, then it would have produced an unbelievable amount of corpus for you, maybe more than two billion.

This is what the power of compounding is!

Compound interest is completely different from the concept of simple interest. In case of simple interest, you earn only on what you have invested, i.e., the principal amount remains the same for all the years until you stay invested. But, in case of compound interest, the principal amount keeps on changing each year or in each interval of time, i.e., the principal amount accumulates interest on itself and together becomes the principal amount for the subsequent time intervals. Thus, you not only earn interest on what you have invested but also on the amount that you have earned in the previous years.

The real power of compounding can be seen over time and not in a year or two. During the long period of time, you can see that the investment becomes extensively aggressive and rolls on to becoming massive each year. Thus, it is said, “Never Underestimate the Power of Compounding.”

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