The power of Compounding is unimaginable
Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.
Albert Einstein
let me explain it with a story and you will realise the power of Compounding…
Once there is poet in a kingdom. He is broke with his financials and have nothing to eat. So he got an idea that he can go to king and show his skills in poetry to win gift and praises from king.
So he started going to kingdom. After many days he got the opportunity to show his skills infront of king. He started his poetry on king and kingdom.
Everyone in the Durbur hall got pleased and overjoyed by his poetry. So king offered a gift, you can choose anything you want. So then poet asked for rice grains full of these 64 blocks, showing towards the chess board. Everyone started laughing including the king.
He explained that he want rice grains of 1 in first block and doubles in second and then goes on doubling to all the 64 blocks. King thought it will cost him nothing more than a bag of rice grains.
But when they started allocating the rice grains as per the chess board. The king and minsters understood that the storage of rice grains of the kingdom is not sufficient to fill all the 64 blocks.
Let me show you math behind this 64 blocks of rice story…
Block rice grains
1st 1
2nd 2
3rd 4
4th 8
5th 16
.
.
.
.
11th 1024
.
.
.
.
32nd 2,147,483,648
.
.
64th 18,446,744,073,709,551,616
Even the last block of grains are unimaginable right?
That’s the power of compounding. So don’t worry to start Investing that you don’t have enough money or you don’t earn enough.
You can start investing with very little amounts of 500 in many mutual funds/ gold/ recurring deposits.
It’s not important in which you are investing in the start. Its important to habituate the process of investing every particular time period ( weekly/ monthly/ quarterly/ yearly ).
For compounding effect you can use the “Rule of 72” to check when your investment get doubles.
For calculating Rule of 72 we need , the returns % we get from the investment annually,
72 / Rate of interest = Time
Where rate of interest is annually and Time in years.
Example : I am getting interest of 12% and let’s calculate how many years my money gets doubled
72 / 12 = 6 years
So with 12% interest my principal amount doubles in every 6 years. It doesn’t matter how much is your principal amount.
So start investing now, to get the most of it.
The famous quote I believe is
Time in the market is more important than Timing the market.
Peter Lynch
Summary: Don’t think that you don’t have enough money, start investing with little amounts. Learn the discipline. The compounding effect helps you with the time.
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